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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal
year ended December 31, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the
transition period from . . . . . . . to . . . . . . . . . .
Commission file number 0-7949
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FIRST HAWAIIAN, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 99-0156159
(State of incorporation) (I.R.S. Employer
Identification No.)
1132 BISHOP STREET, HONOLULU, HAWAII 96813
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (808) 525-7000
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of each exchange on
Title of each class which registered
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None Not Applicable
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $5.00 Par Value
(Title of class)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or
any amendment to this Form 10-K. [ X ]
The aggregate market value of the voting stock held by nonaffiliates
of the registrant as of February 24, 1995 was $503,770,000.
The number of shares outstanding of each of the registrant's classes
of common stock as of February 24, 1995 was:
Title of Class Number of Shares Outstanding
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Common Stock, $5.00 Par Value 31,978,563 Shares
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference
in this Form 10-K:
DOCUMENTS FORM 10-K REFERENCE
First Hawaiian, Inc. Annual Report 1994 Parts I and II
First Hawaiian, Inc. Proxy Statement dated
March 1, 1995 for the Annual Meeting
of Stockholders Part III
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INDEX
PART I
PAGE
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Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . 11
Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . 14
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
PART III
Item 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . 15
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . 15
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . 15
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
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PART I
ITEM 1. BUSINESS
FIRST HAWAIIAN, INC. -
First Hawaiian, Inc. (the "Corporation"), a Delaware corporation, is a
registered bank holding company under the Bank Holding Company Act of 1956, as
amended. As a bank holding company, the Corporation is allowed to acquire or
invest in the securities of companies that are engaged in banking or in
activities closely related to banking as authorized by the Federal Reserve
Board. The Corporation is also a registered savings and loan holding company
under section 10 of the Home Owner's Loan Act, as amended. The Corporation,
through its subsidiaries, operates a general commercial banking business and
other businesses related to banking. Its principal assets are its investments
in First Hawaiian Bank (the "Bank"), a State of Hawaii chartered bank; First
Hawaiian Creditcorp, Inc. ("Creditcorp") and First Hawaiian Leasing, Inc.
("FHL"), each a financial services loan company; and Pioneer Federal Savings
Bank ("Pioneer"), a federally chartered savings bank. The Bank, Creditcorp,
FHL and Pioneer are wholly-owned subsidiaries of the Corporation. At December
31, 1994, the Corporation had consolidated total assets of $7.5 billion, total
deposits of $5.2 billion and total stockholders' equity of $627.9 million.
Based on assets as of June 30, 1994, the Corporation was the 77th largest bank
holding company in the United States as reported in the American Banker.
FIRST HAWAIIAN BANK -
The Bank, the oldest financial institution in Hawaii, was established as Bishop
& Co. in 1858 in Honolulu. After several corporate mergers and other changes,
the Bank is now a state chartered bank. The Bank is not a member of the
Federal Reserve System. The deposits of the Bank are insured by the Federal
Deposit Insurance Corporation (the "FDIC") to the extent and subject to the
limitations set forth in the Federal Deposit Insurance Act, as amended.
The Bank is a full-service bank conducting a general commercial and consumer
banking business and offering trust services. Its banking activities include
receiving demand, savings and time deposits for personal and commercial
accounts; making commercial, agricultural, real estate and consumer loans;
acting as a United States tax depository facility; providing money transfer and
cash management services; selling traveler's checks, bank money orders, mutual
funds and annuities; issuing letters of credit; handling domestic and foreign
collections; providing safe deposit and night depository facilities; lease
financing; and investing in U.S. Treasury securities and securities of other
U.S. government agencies and corporations and state and municipal securities.
As of December 31, 1994, the Bank had total deposits of $4.4 billion and total
assets of $6.3 billion, making it the second largest bank in Hawaii.
Domestic Services -
The domestic operations of the Bank are carried out through its main banking
office located in Honolulu, Hawaii and 60 other banking offices located
throughout the State of Hawaii. Fifty-seven of the offices are equipped with
automatic teller machines which provide 24-hour service to customers wishing to
make withdrawals from and deposits to their personal checking accounts, to
transfer funds between checking and savings accounts, to make balance
inquiries, to obtain interim bank statements, and to make utility and loan
payments. Seventeen nonbranch locations provide balance inquiry and withdrawal
transaction services only. The Bank is a member of the
CIRRUS(R)/MasterCard(R), Plus(R)/VISA(R) and Star System(R) automatic teller
machine networks, providing its customers with access to their funds nationwide
and in selected foreign countries.
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Lending Activities -
The Bank engages in a broad range of lending activities, including making real
estate, commercial and consumer loans and leases. At December 31, 1994, the
Bank's loans totalled $4.4 billion, representing 69.8% of total assets. At
that date, 52.1% of the loans were construction, commercial and residential
real estate loans, 26.1% were commercial loans, 10.6% were consumer loans, 3.7%
were leases and 7.5% were foreign loans.
Real Estate Lending--Construction. The Bank provides construction financing
for a variety of commercial and residential single-family subdivision and
multi-family developments. At December 31, 1994, approximately 12.7% of the
Bank's total real estate loans were collateralized by properties under
construction.
Real Estate Lending--Commercial. In the commercial real estate area, the Bank
provides permanent financing for a variety of commercial developments, such as
various retail facilities, warehouses, and office buildings. At December 31,
1994, approximately 33.7% of the Bank's total real estate loans were
collateralized by commercial properties.
Real Estate Lending--Residential. The Bank makes residential real estate
loans, including home equity loans, to enable borrowers to purchase, refinance
or improve residential real property. The loans are secured by mortgage liens
on the related property, substantially all of which is located in Hawaii. At
December 31, 1994, approximately 53.6% of the Bank's total real estate loans
were collateralized by single-family and multi-family residences.
Commercial Lending. The Bank is a major lender to primarily small- and
medium-sized businesses (including local subsidiaries and operations of foreign
companies) in Hawaii and Hawaii companies doing business overseas with
particular emphasis on those companies in the Asia-Pacific region.
Consumer Lending. The Bank offers many types of loans and credits to
consumers. The Bank provides lines of credit, uncollateralized or
collateralized, and provides various types of personal and automobile loans.
The Bank also provides indirect consumer automobile financing on new and used
autos by purchasing finance contracts from dealers. The Bank's Dealer Center
is the largest commercial bank automobile lender in the State of Hawaii. The
Bank is the largest issuer of MasterCard(R) credit cards and the second largest
issuer of VISA(R) credit cards in Hawaii.
International Banking Services -
The Bank maintains an International Banking Division which provides
international banking products and services through the Bank's branch system,
international banking headquarters in Honolulu, a Grand Cayman branch, two Guam
branches and a representative office in Tokyo, Japan. The Bank maintains a
network of correspondent banking relationships throughout the world.
The Bank's international banking activities are primarily trade-related and are
concentrated in the Asia-Pacific area. The Bank has no loans to lesser
developed countries.
Trust Services -
The Bank's Asset Management Division offers a full range of trust and
investment management services. The Division provides asset management,
advisory and administrative services for estates, trusts and individuals. It
also acts as trustee and custodian of retirement and other employee benefit
plans. As of December 31, 1994, the Asset Management Division had 5,981
accounts with a market value of $7.6 billion. Of this total, $5.8 billion
represented assets in non-managed accounts and $1.8 billion were managed
assets.
The Asset Management Division maintains custodial accounts under which it acts
as agent for customers in rendering a variety of services, including dividend
and interest collection, collection under installment obligations, and rent
collection.
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The Asset Management Division also acts as corporate trustee or co-trustee for
bond issues totaling $1.9 billion in principal amount.
FIRST HAWAIIAN CREDITCORP, INC. -
Creditcorp is a financial services loan company with 12 branch offices located
throughout the four major islands of the State of Hawaii and a branch office in
Guam. Creditcorp also has a commercial loan production office in Honolulu.
The lending activities of Creditcorp are concentrated in consumer and
commercial financing which are primarily collateralized by real estate.
Creditcorp's primary source of funds is time and savings deposits which are
insured by the FDIC to the extent and subject to the limitations set forth in
the Federal Deposit Insurance Act, as amended.
Creditcorp also utilizes borrowings as an additional source of funding for its
loan portfolio and is a member of the Federal Home Loan Bank of Seattle (the
"FHLB of Seattle") which provides a central credit facility for member
institutions. As of December 31, 1994, Creditcorp was required, in accordance
with the rules and regulations of the FHLB of Seattle, to maintain a minimum
level of capital stock ownership of $4.5 million in this regional facility. As
of December 31, 1994, Creditcorp's investment in the capital stock of the FHLB
of Seattle totalled $6.8 million and advances from the FHLB of Seattle
aggregated $57.0 million.
At December 31, 1994, Creditcorp had total deposits of $337.9 million, total
loans and leases of $430.4 million and total assets of $448.7 million.
FIRST HAWAIIAN LEASING, INC. -
FHL, a financial services loan company, primarily finances and leases personal
property and equipment and acts as an agent, broker or advisor in the leasing
or financing of such property for affiliates as well as third parties. Through
a special purpose subsidiary, FHL finances and leases selected real property.
As of December 31, 1994, FHL's net investment in leases amounted to $64.0
million and total assets were $94.2 million. FHL's primary source of funds is
borrowings from the Corporation and the Bank.
PIONEER FEDERAL SAVINGS BANK -
On August 6, 1993, the Corporation acquired for cash all of the outstanding
stock of Pioneer Fed BanCorp, Inc. ("Pioneer Holdings") at a purchase price of
$87 million through the merger of Pioneer Holdings with and into the
Corporation (the "Merger"). As a result of the Merger, Pioneer became a
wholly-owned subsidiary of the Corporation (see "Note 1. Business Combination
- - Pioneer Federal Savings Bank" (page 41) in the Financial Review section of
the Corporation's Annual Report 1994, which is incorporated herein by reference
thereto).
Pioneer is a federally chartered savings bank operating in the State of Hawaii.
Pioneer, the oldest savings bank in Hawaii, was chartered in 1890 by King David
Kalakaua. Presently, Pioneer maintains 19 branch offices located on the four
major islands of the State of Hawaii. At December 31, 1994, Pioneer had total
assets of $759.6 million. Based on total assets at December 31, 1994, Pioneer
was the fourth largest of six Savings Association Insurance Fund ("SAIF") -
insured institutions operating in the State of Hawaii.
Pioneer is primarily engaged in attracting deposits from the general public
through a variety of deposit products. Together with borrowings, principally
from the FHLB of Seattle, and funds from ongoing operations, these
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resources are invested in the origination of conventional adjustable and fixed
rate, one-to-four family residential mortgages. Pioneer is also engaged in
other types of mortgage lending, including home equity loans, loans on smaller
multi-family projects and, to a lesser extent, in other consumer lending
activities. Mortgage lending activity, both origination and purchases, has
been limited to loans secured by property in the State of Hawaii. As of
December 31, 1994, Pioneer was required, in accordance with the rules and
regulations of the FHLB of Seattle, to maintain a minimum level of capital
stock ownership of $11.1 million in this regional facility. As of December 31,
1994, Pioneer's investment in the capital stock of the FHLB of Seattle totalled
$26.9 million and advances from the FHLB of Seattle aggregated $222.4 million.
At December 31, 1994, Pioneer had total deposits of $394.0 million, total loans
of $645.2 million and total assets of $759.6 million.
HAWAII COMMUNITY REINVESTMENT CORPORATION -
In an effort to support affordable housing and as part of the Bank's,
Creditcorp's and Pioneer's community reinvestment program, the Bank, Creditcorp
and Pioneer are members of the Hawaii Community Reinvestment Corporation (the
"HCRC"). The HCRC is a consortium of local financial institutions and provides
$50 million in permanent long-term financing for affordable housing projects
throughout Hawaii for low and moderate income residents.
The $50 million loan pool is funded by the member financial institutions which
participate pro rata (based on deposit size) in each HCRC loan. The Bank's,
Creditcorp's and Pioneer's participations in these HCRC loans are included in
each of these companies' loan portfolio.
HURRICANE INIKI -
On September 11, 1992, Hurricane Iniki struck the Island of Kauai and, to a
lesser extent, the west side of the Island of Oahu, causing extensive property
damage. As a result of the hurricane damage, three property insurance
companies affiliated with each other failed in 1993 and several other property
insurers temporarily discontinued writing or renewing homeowners property
insurance in Hawaii. The Bank, Creditcorp and Pioneer (and all other real
estate lenders) require and rely upon the availability of adequate homeowners
property insurance on residential properties which serve as primary collateral
for loans. If homeowners property insurance were for any reason not available,
the subsidiaries of the Corporation would either be forced to discontinue real
property lending or be exposed to risk of loss if uninsured collateral were
destroyed by fire or other casualties. In addition, such loans would not be
saleable in the secondary market.
However, homeowners property insurance is available. Pursuant to legislation
enacted by the Hawaii State Legislature, the State of Hawaii established the
Hawaii Hurricane Relief Fund (the "HHRF"). The HHRF is funded by assessments
on the State's licensed insurers and reinsurers, insurance premiums and special
mortgage recording fees dedicated to the fund. The HHRF provides the principal
coverage for hurricane damage, while existing property insurers provide other
homeowners insurance coverages. In general, the premium cost of homeowners
property insurance has increased 2-1/2 to 3 times pre-hurricane levels, but
none of the Corporation's subsidiaries has experienced an adverse impact on its
residential loan portfolio as a result of increased premium rates.
In cases where the customer has been unable to obtain property insurance on
residential properties collateralizing loans, the Bank, Creditcorp and Pioneer
have been able to obtain "force placed" homeowners property coverage through
insurance policies obtained by the subsidiaries at the borrowers' expense to
cover the mortgage loan collateral.
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EMPLOYEES -
As of December 31, 1994, the Corporation had 3,040 full-time equivalent
employees. The Bank employed 2,684 persons and nonbank subsidiaries employed
356 persons. None are represented by any collective bargaining agreements and
relations with employees are considered excellent.
MONETARY POLICY AND ECONOMIC CONDITIONS -
The earnings and growth of the Corporation are affected not only by general
economic conditions, but also by the monetary policies of various governmental
regulatory authorities, particularly the Board of Governors of the Federal
Reserve System (the "Federal Reserve Board"). The Federal Reserve Board
implements national monetary policy by its open market operations in United
States Government securities, control of the discount rate, and establishment
of reserve requirements against both member and nonmember financial
institutions' deposits. These actions have a significant effect on the overall
growth and distribution of loans, investments and deposits as well as the rates
earned on loans, or paid on deposits.
It is not possible to predict the effect of future changes in monetary policies
upon the operating results of the Corporation.
COMPETITION -
Competition in the financial services industry in Hawaii is intense.
Hawaii-based commercial banks, savings institutions, financial services loan
companies and credit unions compete against one another. Based upon the latest
available figures, total deposits of all financial institutions in Hawaii as of
June 30, 1994 amounted to approximately $20 billion. The two largest bank
holding companies, Bancorp Hawaii, Inc. and the Corporation, accounted for 26%
and 24% of total deposits, respectively. The next largest competitors were
American Savings Bank, F.S.B. and Bank of America, F.S.B., with 11% and 7%,
respectively, of total deposits. In addition, out-of-state mutual funds,
insurance companies, brokerage firms and other financial services providers
also compete for consumer and commercial business in Hawaii.
Foreign (non-Hawaii) banks and other financial institutions are able to make
loans in Hawaii through Edge Act facilities, finance and mortgage company
subsidiaries and by loan participations with local banks. United States
domestic banks and other financial institutions may make loans directly in
Hawaii by qualifying as "foreign lenders" in Hawaii. Foreign banks currently
conduct various banking activities in Hawaii, except for retail deposit-taking.
Banks and bank holding companies organized under the laws of Pacific Ocean
jurisdictions with United States dollar-based economies may acquire Hawaii
banks or establish branches in Hawaii, although none have done so to date.
Banks and similar financial institutions of countries other than the United
States may and do have representative offices or agencies in Hawaii. Under the
rules of the Office of Thrift Supervision (the "OTS"), federally-chartered
savings associations may open branches in, or merge with another savings
association located in, any state (including Hawaii), subject to certain
conditions.
Hawaii has no law permitting interstate bank acquisitions or branching in
Hawaii by foreign (non-Hawaii) banks. The Hawaii State Legislature has
previously considered and rejected broad interstate banking legislation.
However, the acquisition of failing state-chartered financial institutions by
out-of-state financial institutions is permitted in certain limited
circumstances.
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The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 was
enacted into law on September 29, 1994. The law provides that, among other
things, substantially all state law barriers to the acquisition of banks by
out-of-state bank holding companies will be eliminated effective on September
29, 1995. The law will also permit interstate branching by banks effective as
of June 1, 1997, subject to the ability of states to opt-out completely or to
set an earlier effective date. The Hawaii State Legislature has not taken any
action on the opt-out election. The effect of the new law may be to increase
competition within the markets in which the Corporation now operates, although
the Corporation cannot predict whether and to what extent competition will
increase in these markets.
SUPERVISION AND REGULATION -
As a bank holding company, the Corporation is subject to supervision and
examination by the Federal Reserve Board under the Bank Holding Company Act of
1956, as amended. The Corporation is also regulated and supervised by the OTS
as a savings and loan holding company by virtue of its ownership of Pioneer.
The various subsidiaries of the Corporation are subject to regulation and
supervision by the state banking authorities of Hawaii, the Federal Reserve
Board, the FDIC, the OTS and various other regulatory agencies.
Holding Company Structure. In general, the Bank Holding Company Act of 1956,
as amended, limits the business of bank holding companies to owning or
controlling banks and engaging in such other activities as the Federal Reserve
Board may determine to be so closely related to banking as to be a proper
incident thereto. The Corporation must obtain the prior approval of the
Federal Reserve Board before acquiring direct or indirect ownership or control
of any voting shares of any bank if after such acquisition it would own or
control, directly or indirectly, more than 5% of the voting shares of such
bank; before merging or consolidating with another bank holding company; and
before acquiring substantially all of the assets of any additional bank. With
certain exceptions, the Bank Holding Company Act of 1956, as amended, prohibits
bank holding companies from acquiring direct or indirect ownership or control
of more than 5% of any class of voting shares in any company which is not a
bank or a bank holding company, unless the Federal Reserve Board determines
that the activities of such company are so closely related to banking as to be
a proper incident thereto. In making such determinations, the Federal Reserve
Board considers, among other things, whether the performance of such activities
by a bank holding company would offer benefits to the public that outweigh
possible adverse effects. In addition, all acquisitions are reviewed by the
Department of Justice for antitrust considerations.
The principal source of the Corporation's cash revenue has been dividends and
interest received from the Bank and other subsidiaries of the Corporation.
Under Hawaii law, the Bank is prohibited from declaring or paying any dividends
in excess of its retained earnings. Pioneer and Creditcorp are also subject to
regulatory limitations on the amount of dividends they may declare and pay. At
December 31, 1994, the aggregate amount of dividends that such subsidiaries
could pay to the Corporation under the foregoing limitations without prior
regulatory approval was $334.0 million. There are also statutory limits on the
transfer of funds to the Corporation and certain of its nonbanking subsidiaries
by the Bank or by Pioneer, whether in the form of loans or other extensions of
credit, investments or asset purchases. Such transfers by the Bank to the
Corporation or any such nonbanking subsidiary are limited in amount to 10% of
the Bank's capital and surplus, or 20% in the aggregate. Pioneer is subject to
comparable limitations. Furthermore, such loans and extensions of credit are
required to be collateralized in specified amounts.
If, in the opinion of the applicable regulatory authority, a bank under its
jurisdiction is engaged in or is about to engage in an unsafe or unsound
practice (which, depending on the financial condition of the bank, could
include the payment of dividends), such authority may require, after notice and
hearing, that such bank cease and desist from such practice. The Federal
Reserve Board and the FDIC have issued policy statements which provide that, as
a general matter, insured banks and bank holding companies should only pay
dividends out of current operating earnings. In addition, the regulatory
capital requirements of the Federal Reserve Board, the FDIC and the OTS may
limit the ability of the Corporation and its insured depository subsidiaries to
pay dividends. See "Federal
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Deposit Insurance Corporation Improvement Act of 1991" and "Capital
Requirements," below.
Under Federal Reserve Board policy, a bank holding company is expected to act
as a source of financial strength to each subsidiary bank and to make capital
infusions into a troubled subsidiary bank, and the Federal Reserve Board may
charge the bank holding company with engaging in unsafe and unsound practices
for failure to commit resources to a subsidiary bank. This capital infusion
may be required at times when the Corporation may not have the resources to
provide it. Any capital loans by the Corporation to its subsidiary bank would
be subordinate in right of payment to deposits and to certain other
indebtedness of such subsidiary bank. In connection with its application to
the Federal Reserve Board for authority to acquire Pioneer, the Corporation
committed that Pioneer will meet all present and future minimum capital ratios
adopted for savings associations by the OTS or the FDIC. In the event of the
bankruptcy of the Corporation, this commitment would be assumed by the
bankruptcy trustee and be entitled to a priority of payment.
In addition, depository institutions insured by the FDIC can be held liable for
any losses incurred by, or reasonably expected to be incurred by, the FDIC
after August 9, 1989 in connection with (i) the default of a commonly
controlled FDIC-insured depository institution or (ii) any assistance provided
by the FDIC to a commonly controlled FDIC-insured depository institution in
danger of default. "Default" is defined generally as the appointment of a
conservator or receiver and "in danger of default" is defined generally as the
existence of certain conditions indicating that a "default" is likely to occur
in the absence of regulatory assistance. Accordingly, in the event that any
insured subsidiary of the Corporation causes a loss to the FDIC, other insured
subsidiaries of the Corporation could be required to compensate the FDIC by
reimbursing it for the amount of such loss. Any such obligation by the
Corporation's insured subsidiaries to reimburse the FDIC would rank senior to
their obligations, if any, to the Corporation.
Federal Deposit Insurance Corporation Improvement Act of 1991. In December
1991, Congress enacted the Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA"), which substantially revised the regulatory and funding
provisions of the Federal Deposit Insurance Act and made revisions to several
other federal banking statutes. FDICIA provided for, among other things, (i) a
recapitalization of the Bank Insurance Fund by increasing the FDIC's borrowing
authority; (ii) annual on-site examinations of federally-insured depository
institutions by banking regulators; (iii) publicly available annual financial
condition and management reports for financial institutions, including audits
by independent accountants; (iv) the establishment of uniform accounting
standards by federal banking agencies; (v) the establishment of "prompt
corrective action" standards for depository institutions based on five levels
of capitalization, with more scrutiny and restrictions placed on institutions
with lower levels of capital; (vi) additional grounds for the appointment of a
conservator or receiver for a failed or failing depository institution; (vii) a
requirement that the FDIC use the least-cost method of resolving cases of
troubled institutions in order to keep the costs to insurance funds at a
minimum; (viii) more comprehensive regulation and examination of foreign banks;
(ix) consumer protection provisions including a Truth-in-Savings Act; (x) a
requirement that the FDIC establish a risk-based deposit insurance assessment
system to be in effect no later than January 1, 1994; (xi) restrictions or
prohibitions on accepting brokered deposits except for institutions which
significantly exceed minimum capital requirements; (xii) general restrictions
on the activities as principal and equity investments of state-chartered banks
to those permissible for national banks unless approved by the FDIC; and (xiii)
certain limits on deposit insurance coverage.
A central feature of FDICIA is the requirement that the federal banking
agencies take "prompt corrective action" with respect to insured depository
institutions that do not meet minimum capital requirements. FDICIA established
five capital levels applicable to such institutions (including the Bank):
"well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized" and "critically undercapitalized." Under the
regulations adopted by the federal banking agencies to implement these
provisions of FDICIA, a depository institution is "well capitalized" if it has
(i) a total risk-based capital ratio of 10% or greater, (ii) a Tier 1
risk-based capital ratio of 6% or greater, (iii) a leverage ratio of 5% or
greater and (iv) is not subject to any written agreement, order or directive
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to meet and maintain a specific capital level for any capital measure. An
"adequately capitalized" institution is defined as one that has (i) a total
risk-based capital ratio of 8% or greater, (ii) a Tier 1 risk-based capital
ratio of 4% or greater and (iii) a leverage ratio of 4% or greater (or 3% or
greater in the case of a bank with a composite CAMEL rating of 1). A
depository institution is considered (i) "undercapitalized" if it has (A) a
total risk-based capital ratio of less than 8%, (B) a Tier 1 risk-based capital
ratio of less than 4% or (C) a leverage ratio of less than 4% (or 3% in the
case of an institution with a CAMEL rating of 1), (ii) "significantly
undercapitalized" if it has (A) a total risk-based capital ratio of less than
6%, (B) a Tier 1 risk-based capital ratio of less than 3% or (C) a leverage
ratio of less than 3% and (iii) "critically undercapitalized" if it has a ratio
of tangible equity to total assets equal to or less than 2%. An institution
may be deemed by the regulators to be in a capitalization category that is
lower than is indicated by its actual capital position if, among other things,
it receives an unsatisfactory examination rating. At December 31, 1994, all of
the Corporation's subsidiary depository institutions were "well capitalized".
FDICIA generally prohibits a depository institution from making any capital
distribution (including payment of a cash dividend) or paying any management
fees to its holding company if the depository institution is, or would
thereafter be, undercapitalized. Undercapitalized depository institutions are
subject to growth limitations and are required to submit a capital restoration
plan. The federal banking agencies may not accept a capital plan without
determining, among other things, that the plan is based on realistic
assumptions and is likely to succeed in restoring the depository institution's
capital. In addition, for a capital restoration plan to be acceptable, the
depository institution's parent holding company must guarantee that the
institution will comply with such capital restoration plan. The aggregate
liability of the parent holding company under such guarantee is limited to the
lesser of (i) an amount equal to 5% of the depository institution's total
assets at the time it became undercapitalized, or (ii) the amount which is
necessary (or would have been necessary) to bring the institution into
compliance with all capital standards applicable to such institution as of the
time it fails to comply with the plan. If a depository institution fails to
submit an acceptable plan, it is treated as if it is significantly
undercapitalized.
Significantly undercapitalized depository institutions may be subject to a
number of other requirements and restrictions, including orders to sell
sufficient voting stock to become adequately capitalized, requirements to
reduce total assets and cessation of receipt of deposits from correspondent
banks. Critically undercapitalized institutions are subject to the appointment
of a receiver or conservator, generally within 90 days of the date such
institution becomes critically undercapitalized. In addition, the FDIC has
adopted regulations under FDICIA prohibiting an insured depository institution
from accepting brokered deposits (as defined by the regulations) unless the
institution is "well capitalized" or is "adequately capitalized" and receives a
waiver from the FDIC.
FDICIA also provided for increased funding of the FDIC insurance funds. In
addition, the FDIC has implemented a risk-based deposit insurance assessment
system under which the assessment rate for an insured institution may vary
according to the regulatory capital levels of the institution and other factors
(including supervisory evaluations). There is an eight basis point spread
between the highest and lowest assessment rates, so that financial institutions
classified as strongest by the FDIC are subject to a rate of .23% per $100 of
insured deposits, and financial institutions classified as weakest by the FDIC
are subject to a rate of .31%. On February 16, 1995, the FDIC proposed a new
assessment rate schedule for financial institutions insured by the Bank
Insurance Fund ("BIF") of the FDIC, with a spread of .04% to .31%, which is
expected to take effect on September 30, 1995. The Corporation believes that
the proposed rate schedule, if adopted in its present form, would significantly
reduce the deposit premiums that the Bank and Creditcorp currently pay to the
FDIC. The FDIC is not expected to reduce assessment rates for SAIF.
Consequently, Pioneer does not expect any significant reduction in SAIF
assessments.
Capital Requirements. The Corporation and certain of its subsidiaries are
subject to regulatory capital guidelines issued by the federal banking
agencies. Information with respect to the applicable capital requirements is
included in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" (page 31) in the Financial Review section of the
Corporation's Annual Report 1994, and is incorporated herein by reference
thereto.
8
11
FDICIA required each federal banking agency to revise its risk-based capital
standards to ensure that those standards take adequate account of interest rate
risk, concentration of credit risk and the risk of nontraditional activities,
as well as reflect the actual performance and expected risk of loss on
multi-family mortgages. In September 1993, the federal banking agencies issued
notices of proposed rulemaking soliciting comment on proposed revisions to the
risk-based capital rules to take account of interest rate risk. The notices
propose alternative approaches for determining the additional amount of
capital, if any, that may be required to compensate for interest rate risk.
The first approach would reduce an institution's risk-based capital ratios by
an amount based on its measured exposure to interest rate risk in excess of a
specified threshold. The second approach would assess the need for additional
capital on a case-by-case basis, considering both the level of measured
exposure and qualitative risk factors. The Corporation cannot assess at this
point the impact that such proposals would have on its capital ratios.
9
12
STATISTICAL DISCLOSURES -
Guide 3 of the "Guides for the Preparation and Filing of Reports and
Registration Statements" under the Securities Act of 1933 sets forth certain
statistical disclosures in the "Description of Business" section of bank
holding company filings with the Securities and Exchange Commission. The
statistical information requested is presented in the tables shown below in the
Corporation's Annual Report 1994, which tables are incorporated herein by
reference thereto. The tables and information contained therein have been
prepared by the Corporation and have not been audited or reported upon by the
Corporation's independent accountants.
Information in response to the following applicable sections of Guide 3 is
included in the Financial Review section of the Corporation's Annual Report
1994, and is incorporated herein by reference thereto:
PAGE NUMBERS IN
---------------------------
FIRST HAWAIIAN, INC.
ANNUAL REPORT 1994
DISCLOSURE REQUIREMENTS (EXHIBIT 13)
----------------------- ---------------------------
I. Distribution of Assets, Liabilities and Stockholders' Equity;
Interest Rates and Interest Differential -
A. Average balance sheets 19 - 20
B. Analysis of net interest earnings 19 - 20
C. Dollar amount of change in interest income and interest expense 21, 49
II. Investment Portfolio -
A. Book value of investment securities 42
B. Investment securities by maturities and weighted average yields 33
C. Investment securities in excess of 10% of stockholders' equity 43
III. Loan and Lease Portfolio -
A. Types of loans and leases 26
B. Maturities and sensitivities of loans to changes in interest rates 27, 30
C. Risk elements
1. Nonaccrual, past due and restructured loans and leases 27
2. Foreign outstandings 49
3. Loan concentrations 26 - 27
IV. Summary of Loan and Lease Loss Experience -
A. Analysis of loss experience 23
B. Breakdown of the allowance for loan and lease losses 24
V. Deposits -
A. Average amount and average rate paid on deposits 28
D. Maturity distribution of domestic time certificates of deposits
of $100,000 or more 28
E. Time certificates of deposit in denominations of $100,000 or more
issued by foreign offices 44
VI. Return on Equity and Assets 16
VII. Short-Term Borrowings 44
10
13
ITEM 2. PROPERTIES
A subsidiary of the Bank is the sole general partner in a Hawaii limited
partnership which owns all of a city block in downtown Honolulu containing
55,775 square feet. The Bank's interest in the limited partnership is 99.25%.
The administrative headquarters of the Corporation and the main branch of the
Bank were formerly located on a portion of the city block. The buildings were
demolished and the Bank has begun construction of a modern banking center on
this city block. The new headquarters building will include 418,000 square
feet of gross office space, including the Bank's main branch and administrative
headquarters of the Corporation and the Bank. The new building is anticipated
to be completed in 1996. Information about the lease financing of the new
headquarters building is included in "Note 15. Lease Commitments" (page 49) in
the Financial Review section of the Corporation's Annual Report 1994, which is
incorporated herein by reference thereto. Commencing in March 1993, the Bank
leased approximately 119,000 square feet in another office building for use as
an interim administrative headquarters and main branch until completion of the
new structure. The interim office building is approximately a block and a half
from the old administrative headquarters and main branch.
Seventeen of the Bank's offices in Hawaii are located on land owned in fee
simple by the Bank. The other branches of the Bank, Pioneer and Creditcorp are
situated in leasehold premises or in buildings constructed by the Bank or
Creditcorp on leased land (see "Note 15. Lease Commitments" (pages 49 through
50) in the Financial Review section of the Corporation's Annual Report 1994,
which is incorporated herein by reference thereto). In early 1993, the Bank
completed construction of an operations center located on 125,919 square feet
of land owned in fee simple by the Bank in an industrial area near downtown
Honolulu. The Bank occupies all of the four-story building.
The Bank completed construction of a new five-story, 75,000 square foot office
building, including a branch, on property owned in fee simple in Maite, Guam to
replace its Agana, Guam Branch in late 1994.
ITEM 3. LEGAL PROCEEDINGS
Various legal proceedings are pending against the Corporation or its
subsidiaries. In the opinion of management, based upon advice of counsel, the
aggregate liability, if any, resulting from these proceedings would not have a
material effect on the Corporation's consolidated financial position or results
of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1994.
11
14
EXECUTIVE OFFICERS OF THE REGISTRANT
Listed below are the executive officers of the Corporation with their
positions, age and business experience during the past five years:
BUSINESS EXPERIENCE DURING LAST 5 YEARS
(ALL WITH THE CORPORATION AND THE BANK
OFFICER AGE EXCEPT AS OTHERWISE INDICATED)
- ---------------------------------- --- --------------------------------------------------------------------------
Walter A. Dods, Jr. 53 Chairman of the Board and Chief Executive Officer of the Corporation since
Chairman, Chief Executive 1989; President of the Corporation from 1989 - 1991; Executive Vice President of
Officer and Director the Corporation from 1982 - 1989; Director of the Corporation since 1983;
Chairman of the Board and Chief Executive Officer of the Bank since 1989;
President of the Bank from 1984 - 1989; Director of the Bank since 1979. Mr.
Dods has been with the Bank since 1968.
John A. Hoag 62 President and Director of the Corporation since 1991; Executive Vice President
President and Director of the Corporation from 1982 - 1991; Vice Chairman of the Bank since July 1994;
President of the Bank from 1989 - 1994; Director of the Bank since 1989;
Executive Vice President of the Bank from 1979 - 1989. Mr. Hoag has been with
the Bank since 1960.
John K. Tsui 56 Vice Chairman of the Corporation since July 1994; Director, President and Chief
Vice Chairman Operating Officer of the Bank since July 1994; Director, Chairman and Chief
Executive Officer of FHL since December 1994. Mr. Tsui was Executive Vice
President of Bancorp Hawaii, Inc. from 1986 - June 1994 and was Vice Chairman
of Bank of Hawaii from 1989 - June 1994. Mr. Tsui was with Bancorp Hawaii,
Inc. from 1984 - June 1994.
Philip H. Ching 64 Executive Vice President of the Corporation since 1989; Vice President of the
Executive Vice President Corporation from 1974 - 1989; Vice Chairman of the Bank since 1991; Executive
Vice President of the Bank from 1989 - 1991; Senior Vice President and
Administrative Assistant to the Chairman and Chief Executive Officer of the
Bank from 1979 - 1989. Mr. Ching has been with the Bank and a trust company
acquired by the Bank since 1957.
Donald G. Horner 44 Executive Vice President of the Corporation since 1989; Vice President of the
Executive Vice President Corporation from 1987 - 1989; Vice Chairman of the Bank since July 1994;
Executive Vice President of the Bank from 1992 - 1994; Chairman of Creditcorp
since 1993; Chairman and Chief Executive Officer of Creditcorp from 1992 -
1993; Director of Creditcorp since 1985; President of Creditcorp from 1985 -
1992; Director of FHL since 1983; President of FHL from 1985 - 1994. Mr.
Horner has been with the Bank since 1978.
12
15
BUSINESS EXPERIENCE DURING LAST 5 YEARS
(ALL WITH THE CORPORATION AND THE BANK
OFFICER AGE EXCEPT AS OTHERWISE INDICATED)
- ---------------------------------- --- ---------------------------------------------------------------------------
Howard H. Karr 52 Executive Vice President and Treasurer of the Corporation since 1989; Vice
Executive Vice President and President and Treasurer of the Corporation from 1978 - 1989; Vice Chairman,
Treasurer Chief Financial Officer and Treasurer of the Bank since September 1993; Vice
Chairman and Chief Financial Officer of the Bank from 1991 - 1993; Executive
Vice President and Chief Financial Officer of the Bank from 1989 - 1991; Senior
Vice President and Controller of the Bank from 1979 - 1989. Mr. Karr has been
with the Bank since 1973.
There are no family relationships among any of the executive officers of the
Corporation. There is no arrangement or understanding between any such
executive officer and another person pursuant to which he was elected as an
officer. The term of office of each officer is at the pleasure of the Board of
Directors of the Corporation.
13
16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Required information is included in "Common Stock Information" (page 15) in the
Financial Review section of the Corporation's Annual Report 1994, and is
incorporated herein by reference thereto.
ITEM 6. SELECTED FINANCIAL DATA
Required information is included in "Summary of Selected Consolidated Financial
Data" (page 16) in the Financial Review section of the Corporation's Annual
Report 1994, and is incorporated herein by reference thereto.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Required information is included in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" (pages 17 through 31) in the
Financial Review section of the Corporation's Annual Report 1994, and is
incorporated herein by reference thereto.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following information is included in the Financial Review section of the
Corporation's Annual Report 1994, which is incorporated herein by reference
thereto as follows:
PAGE NUMBER
-----------
Report of Independent Accountants 34
First Hawaiian, Inc. and Subsidiaries:
Consolidated Balance Sheets at December 31, 1994 and 1993 35
Consolidated Statements of Income for the years ended
December 31, 1994, 1993 and 1992 36
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1994, 1993 and 1992 37
Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1993 and 1992 38
First Hawaiian, Inc. (Parent Company):
Balance Sheets at December 31, 1994 and 1993 52
Statements of Income for the years ended December 31, 1994,
1993 and 1992 52
Statements of Changes in Stockholders' Equity for the
years ended December 31, 1994, 1993 and 1992 37
Statements of Cash Flows for the years ended December 31, 1994,
1993 and 1992 53
Notes to Financial Statements 39 - 53
Summary of Quarterly Financial Data (Unaudited) 32
Supplementary Data 33
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
14
17
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Required information relating to directors is included in "Election of
Directors" and "Directors Continuing in Office and Executive Officers" (pages 3
through 9) of the Corporation's Proxy Statement, and is incorporated herein by
reference thereto. Required information relating to executive officers is
included in Part I of this Form 10-K in the section entitled "Executive
Officers of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION
Required information is included in "Compensation of Directors" and "Executive
Compensation" (pages 9 through 20) of the Corporation's Proxy Statement, and is
incorporated herein by reference thereto.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Required information is included in "Outstanding Shares; Voting Rights,"
"Election of Directors" and "Directors Continuing in Office and Executive
Officers" (pages 2 through 8) of the Corporation's Proxy Statement, and is
incorporated herein by reference thereto.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Required information is included in "Certain Transactions" (pages 21 and 22) of
the Corporation's Proxy Statement, and is incorporated herein by reference
thereto.
15
18
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
PAGE NUMBER IN
--------------------
FIRST HAWAIIAN,
INC. ANNUAL
REPORT 1994
(EXHIBIT 13)
--------------------
(a) 1. Financial Statements
The following financial statements are incorporated by reference in Part II
(Item 8) of this Form 10-K:
Report of Independent Accountants 34
First Hawaiian, Inc. and Subsidiaries:
Consolidated Balance Sheets at December 31, 1994 and 1993 35
Consolidated Statements of Income for the
years ended December 31, 1994, 1993 and 1992 36
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1994, 1993 and 1992 37
Consolidated Statements of Cash Flows for the
years ended December 31, 1994, 1993 and 1992 38
First Hawaiian, Inc. (Parent Company):
Balance Sheets at December 31, 1994 and 1993 52
Statements of Income for the years ended
December 31, 1994, 1993 and 1992 52
Statements of Changes in Stockholders' Equity for the
years ended December 31, 1994, 1993 and 1992 37
Statements of Cash Flows for the years ended
December 31, 1994, 1993 and 1992 53
Notes to Financial Statements 39 - 53
2. Financial Statement Schedules
Schedules to the consolidated financial statements required by Article 9 of
Regulation S-X are not required under the related instructions, or the
information is included in the consolidated financial statements, or are
inapplicable, and therefore have been omitted.
3. Exhibits
Exhibit 3 (i) Certificate of Incorporation - Incorporated by reference to
Exhibit 3 to the Corporation's Annual Report on Form 10-K
for the fiscal year ended December 31, 1990 as filed with
the Securities and Exchange Commission.
(ii) Bylaws - Incorporated by reference to Exhibit 3 to the
Corporation's Annual Report on Form 10-K for the fiscal year
ended December 31, 1987 as filed with the Securities and
Exchange Commission.
16
19
Exhibit 4 Instruments defining rights of security holders, including
indentures.
(i) Equity - Incorporated by reference to Exhibit 3(i) hereto.
(ii) Debt - Indenture, dated as of August 9, 1994 between First
Hawaiian, Inc. and The First National Bank of Chicago,
Trustee is incorporated by reference to Exhibit 4(ii) to
the Corporation's Annual Report on Form 10-K for the fiscal
year ended December 31, 1993 as filed with the Securities
and Exchange Commission.
Exhibit 10 Material contracts
(i) Lease dated September 13, 1967, as amended April 21, 1987,
between the Trustees under the Will and of the Estate of
Samuel M. Damon, Deceased, and First National Bank of Hawaii
(predecessor of the Bank) is incorporated by reference to
Exhibit 10 to the Corporation's Annual Report on Form 10-K
for the fiscal year ended December 31, 1987 as filed with
the Securities and Exchange Commission.
(ii) Lease dated May 20, 1982, as amended April 23, 1987, between
the Trustees under the Will and of the Estate of Samuel
M. Damon, Deceased, and First Hawaiian Bank is incorporated
by reference to Exhibit 10 to the Corporation's Annual
Report on Forms 10-K for the fiscal years ended December 31,
1987, 1985 and 1980 as filed with the Securities and
Exchange Commission.
(iii) Lease Agreement dated as of December 1, 1993 between
REFIRST, Inc. and First Hawaiian Bank is incorporated by
reference to Exhibit 10(iii) to the Corporation's Annual
Report on Form 10-K for the fiscal year ended December 31,
1993 as filed with the Securities and Exchange Commission.
(iv) Construction Management, Escrow and Development Agreement
dated as of December 1, 1993 among REFIRST, Inc., First
Hawaiian Bank and First Fidelity Bank, N.A., Pennsylvania
is incorporated by reference to Exhibit 10(iv) to the
Corporation's Annual Report on Form 10-K for the fiscal
year ended December 31, 1993 as filed with the Securities
and Exchange Commission.
(v) Ground Lease dated as of December 1, 1993 among First
Hawaiian Center Limited Partnership, FH Center, Inc. and
REFIRST, Inc. is incorporated by reference to Exhibit 10(v)
to the Corporation's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993 as filed with the
Securities and Exchange Commission.
17
20
(vi) Stock Incentive Plan of First Hawaiian, Inc. dated November
22, 1991 is incorporated by reference to Exhibit 10 to
the Corporation's Annual Report on Form 10-K for the fiscal
year ended December 31, 1991 as filed with the Securities
and Exchange Commission.
(vii) Long-Term Incentive Plan of First Hawaiian, Inc. effective
January 1, 1992 is incorporated by reference to Exhibit 10
to the Corporation's Annual Report on Form 10-K for the
fiscal year ended December 31, 1991 as filed with the
Securities and Exchange Commission.
(viii) First Hawaiian, Inc. Supplemental Executive Retirement
Plan, as amended August 18, 1988 is incorporated by reference
to Exhibit 10 to the Corporation's Annual Report on Form 10-K
for the fiscal year ended December 31, 1992 as filed
with the Securities and Exchange Commission.
(ix) Amendment One to First Hawaiian, Inc. Supplemental Executive
Retirement Plan, effective January 1, 1992 is incorporated
by reference to Exhibit 10 to the Corporation's Annual Report
on Form 10-K for the fiscal year ended December 31, 1992 as
filed with the Securities and Exchange Commission.
(x) First Hawaiian, Inc. Incentive Plan for Key Executives, as
amended through December 13, 1989 is incorporated by
reference to Exhibit 10 to the Corporation's Annual Report
on Form 10-K for the fiscal year ended December 31, 1992 as
filed with the Securities and Exchange Commission.
(xi) Directors' Retirement Plan, effective as of January 1, 1992
is incorporated by reference to Exhibit 10 to the
Corporation's Annual Report on Form 10-K for the fiscal year
ended December 31, 1992 as filed with the Securities and
Exchange Commission.
Exhibit 12 Statement re: computation of ratios.
Exhibit 13 Annual report to security holders - Corporation's Annual
Report 1994.
Exhibit 21 Subsidiaries of the registrant.
Exhibit 27 Financial data schedule.
(b) Reports on Form 8-K - No reports on Form 8-K were filed during the last
quarter of the fiscal year ended December 31, 1994.
(c) Response to this item is the same as Item 14(a)3.
(d) Response to this item is the same as Item 14(a)2.
18
21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
FIRST HAWAIIAN, INC.
(Registrant)
By /s/ HOWARD H. KARR
----------------------------------
HOWARD H. KARR
EXECUTIVE VICE PRESIDENT
AND TREASURER
Date: March 16, 1995
19
22
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
/s/ WALTER A. DODS, JR. Chairman, March 16, 1995
- -------------------------------------- Chief Executive Officer -------------------------
Walter A. Dods, Jr. & Director Date
/s/ JOHN W. A. BUYERS Director March 16, 1995
- -------------------------------------- -------------------------
John W. A. Buyers Date
/s/ JOHN C. COUCH Director March 16, 1995
- -------------------------------------- -------------------------
John C. Couch Date
/s/ JULIA ANN FROHLICH Director March 16, 1995
- -------------------------------------- -------------------------
Julia Ann Frohlich Date
/s/ PAUL MULLIN GANLEY Director March 16, 1995
- -------------------------------------- -------------------------
Paul Mullin Ganley Date
/s/ DAVID M. HAIG Director March 16, 1995
- -------------------------------------- -------------------------
David M. Haig Date
/s/ JOHN A. HOAG President March 16, 1995
- -------------------------------------- & Director -------------------------
John A. Hoag Date
/s/ BERT T. KOBAYASHI, JR. Director March 16, 1995
- ---------------------------------- -------------------------
Bert T. Kobayashi, Jr. Date
/s/ RICHARD T. MAMIYA Director March 16, 1995
- ---------------------------------- -------------------------
Richard T. Mamiya Date
Director
- ------------------------------------------------ -------------------------------
Fujio Matsuda Date
/s/ RODERICK F. McPHEE Director March 16, 1995
- -------------------------------------- -------------------------
Roderick F. McPhee Date
/s/ ROBERT J. PFEIFFER Director March 16, 1995
- ------------------------------------- -------------------------
Robert J. Pfeiffer Date
/s/ GEORGE P. SHEA, JR. Director March 16, 1995
- ------------------------------------ -------------------------
George P. Shea, Jr. Date
/s/ FRED C. WEYAND Director March 16, 1995
- --------------------------------------------- -------------------------
Fred C. Weyand Date
/s/ ROBERT C. WO Director March 16, 1995
- ---------------------------------------------- -------------------------
Robert C. Wo Date
/s/ HOWARD H. KARR Executive Vice President March 16, 1995
- --------------------------------------------- & Treasurer -------------------------
Howard H. Karr (Principal financial and Date
accounting officer)
20
23
EXHIBIT INDEX
Exhibit
Number Description
3 (i) Certificate of Incorporation - Incorporated by reference to Exhibit
3 to the Corporation's Annual Report on Form 10-K for the fiscal
year ended December 31, 1990 as filed with the Securities and
Exchange Commission.
(ii) Bylaws - Incorporated by reference to Exhibit 3 to the
Corporation's Annual Report on Form 10-K for the fiscal year ended
December 31, 1987 as filed with the Securities and Exchange
Commission.
4 Instruments defining rights of security holders, including
indentures.
(i) Equity - Incorporated by reference to Exhibit 3(i) hereto.
(ii) Debt - Indenture, dated as of August 9, 1993 between First
Hawaiian, Inc. and The First National Bank of Chicago, Trustee is
incorporated by reference to Exhibit 4(ii) to the Corporation's
Annual Report on Form 10-K for the fiscal year ended December 31,
1993 as filed with the Securities and Exchange Commission.
10 Material contracts
(i) Lease dated September 13, 1967, as amended April 21, 1987, between
the Trustees under the Will and of the Estate of Samuel M. Damon,
Deceased, and First National Bank of Hawaii (predecessor of the
Bank) is incorporated by reference to Exhibit 10 to the
Corporation's Annual Report on Form 10-K for the fiscal year ended
December 31, 1987 as filed with the Securities and Exchange
Commission.
(ii) Lease dated May 20, 1982, as amended April 23, 1987, between the
Trustees under the Will and of the Estate of Samuel M. Damon,
Deceased, and First Hawaiian Bank is incorporated by reference to
Exhibit 10 to the Corporation's Annual Report on Forms 10-K for the
fiscal years ended December 31, 1987, 1985 and 1980 as filed with
the Securities and Exchange Commission.
(iii) Lease Agreement dated as of December 1, 1993 between REFIRST, Inc.
and First Hawaiian Bank is incorporated by reference to Exhibit
10(iii) to the Corporation's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993 as filed with the Securities
and Exchange Commission.
21
24
(iv) Construction Management, Escrow and Development Agreement dated as
of December 1, 1993 among REFIRST, Inc., First Hawaiian Bank and
First Fidelity Bank, N.A., Pennsylvania is incorporated by
reference to Exhibit 10(iv) to the Corporation's Annual Report on
Form 10-K for the fiscal year ended December 31, 1993 as filed with
the Securities and Exchange Commission.
(v) Ground Lease dated as of December 1, 1993 among First Hawaiian
Center Limited Partnership, FH Center, Inc. and REFIRST, Inc. is
incorporated by reference to Exhibit 10(v) to the Corporation's
Annual Report on Form 10-K for the fiscal year ended December 31,
1993 as filed with the Securities and Exchange Commission.
(vi) Stock Incentive Plan of First Hawaiian, Inc. dated November 22,
1991 is incorporated by reference to Exhibit 10 to the
Corporation's Annual Report on Form 10-K for the fiscal year ended
December 31, 1991 as filed with the Securities and Exchange
Commission.
(vii) Long-Term Incentive Plan of First Hawaiian, Inc. effective
January 1, 1992 is incorporated by reference to Exhibit 10 to the
Corporation's Annual Report on Form 10-K for the fiscal year ended
December 31, 1991 as filed with the Securities and Exchange
Commission.
(viii) First Hawaiian, Inc. Supplemental Executive Retirement Plan, as
amended August 18, 1988 is incorporated by reference to Exhibit 10
to the Corporation's Annual Report on Form 10-K for the fiscal year
ended December 31, 1992 as filed with the Securities and Exchange
Commission.
(ix) Amendment One to First Hawaiian, Inc. Supplemental Executive
Retirement Plan, effective January 1, 1992 is incorporated by
reference to Exhibit 10 to the Corporation's Annual Report on Form
10-K for the fiscal year ended December 31, 1992 as filed with the
Securities and Exchange Commission.
(x) First Hawaiian, Inc. Incentive Plan for Key Executives, as amended
through December 13, 1989 is incorporated by reference to Exhibit
10 to the Corporation's Annual Report on Form 10-K for the fiscal
year ended December 31, 1992 as filed with the Securities and
Exchange Commission.
(xi) Directors' Retirement Plan, effective as of January 1, 1992 is
incorporated by reference to Exhibit 10 to the Corporation's Annual
Report on Form 10-K for the fiscal year ended December 31, 1992 as
filed with the Securities and Exchange Commission.
12 Statement re: computation of ratios.
13 Annual report to security holders - Corporation's Annual Report
1994.
21 Subsidiaries of the registrant.
27 Financial data schedule.
22
1
Exhibit 12. Statement re: Computation of Ratios
First Hawaiian, Inc. and Subsidiaries
Computation of Consolidated Ratios of Earnings to Fixed Charges
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1994 1993 1992 1991 1990
-------- -------- -------- -------- --------
(dollars in thousands)
Income before income taxes
and cumulative effect of a
change in accounting principle $111,501 $119,105 $127,880 $120,200 $104,540
-------- -------- -------- -------- --------
Fixed charges:(1)
Interest expense 179,688 163,541 217,693 270,851 283,676
Capitalized interest 789 1,084 3,732 1,404 -
Rental expense 4,566 2,929 2,069 1,510 851
-------- -------- -------- -------- --------
185,043 167,554 223,494 273,765 284,527
Less interest on deposits 120,289 129,719 186,725 255,099 271,710
-------- -------- -------- -------- --------
Net fixed charges 64,754 37,835 36,769 18,666 12,817
-------- -------- -------- -------- --------
Earnings, excluding
interest on deposits $176,255 $156,940 $164,649 $138,866 $117,357
======== ======== ======== ======== ========
Earnings, including
interest on deposits $296,544 $286,659 $351,374 $393,965 $389,067
======== ======== ======== ======== ========
Ratio of earnings to
fixed charges:
Excluding interest
on deposits 2.72 x 4.15 x 4.48 x 7.44 x 9.16 x
Including interest
on deposits 1.60 x 1.71 x 1.57 x 1.44 x 1.37 x
(1) For purposes of computing the above ratios, earnings represent income
before income taxes and cumulative effect of a change in accounting
principle plus fixed charges. Fixed charges, excluding interest on
deposits, include interest (other than on deposits), whether expensed or
capitalized, and that portion of rental expense (generally one third)
deemed representative of the interest factor. Fixed charges, including
interest on deposits, include all interest, whether expensed or
capitalized, and that portion of rental expense (generally one third)
deemed representative of the interest factor.
1
EXHIBIT 13
CORPORATION'S
ANNUAL REPORT 1994
2
FIRST HAWAIIAN, INC. FINANCIAL REVIEW 1994 Index to Financial Review
- --------------------------------------------------------------------------------
14 Corporate Organization
15 Common Stock Information
16 Summary of Selected Consolidated Financial Data
17 Management's Discussion and Analysis of
Financial Condition and Results of Operations
32 Summary of Quarterly Financial Data (Unaudited)
33 Supplementary Data
34 Report of Independent Accountants
Financial Statements:
35 Consolidated Balance Sheets
36 Consolidated Statements of Income
37 Consolidated Statements of Changes
in Stockholders' Equity
38 Consolidated Statements of Cash Flows
39 Notes to Financial Statements
54 Corporate Addresses
54 Supplemental Information
13
3
CORPORATE ORGANIZATION First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
FIRST HAWAIIAN, INC.
First Hawaiian, Inc. (the "Company") is a registered bank holding company under
the Bank Holding Company Act of 1956, as amended, and is incorporated under the
laws of the State of Delaware. As a bank holding company, the Company is
allowed to acquire or invest in the securities of companies that are engaged in
banking or in activities closely related to banking as authorized by the
Federal Reserve Board. The Company is also registered with the Office of Thrift
Supervision as a savings and loan holding company as a result of its ownership
of Pioneer Federal Savings Bank ("Pioneer").
The Company's organization consists of the following wholly-owned
subsidiaries:
FIRST HAWAIIAN BANK
First Hawaiian Bank (the "Bank") was founded in 1858 and is the oldest
financial institution in Hawaii. The Bank is a full-service bank conducting
general commercial and consumer banking business and offering trust services.
The Bank's activities include receiving demand, savings and time deposits;
making commercial, agricultural, real estate and consumer loans; selling
traveler's checks, bank money orders, mutual funds and annuities; issuing
letters of credit; handling domestic and foreign collections; renting safe
deposit boxes; and providing data processing services to customers.
The Bank's main office is located in Honolulu, Hawaii with 60 other banking
offices located throughout the State of Hawaii. It also has two banking offices
in Guam, an offshore branch in Grand Cayman, British West Indies, a
representative office in Tokyo, Japan and a worldwide network of correspondent
banks.
Deposits in the Bank are insured by the Federal Deposit Insurance
Corporation (the "FDIC") to the extent, and subject to the limitations, set
forth in the Federal Deposit Insurance Act, as amended (the "Act"). The Bank is
a State of Hawaii chartered bank and is not a member of the Federal Reserve
System.
The Bank also conducts business through the following wholly-owned
subsidiaries:
. FH CENTER, INC.
FH Center, Inc. was organized to own certain real property in
connection with the construction of First Hawaiian Center.
. FHB MORTGAGE COMPANY, INC.
FHB Mortgage Company, Inc. was organized to operate a mortgage
brokerage company and is presently doing business as Phoenix Financial
Services in Honolulu, Hawaii.
. FIRST HAWAIIAN OVERSEAS CORPORATION
First Hawaiian Overseas Corporation is engaged in foreign banking
investments and activities outside the United States.
. FHB PROPERTIES, INC. AND
AMERICAN SECURITY PROPERTIES, INC.
FHB Properties, Inc. and American Security Properties, Inc. were
organized to hold title to certain property and premises upon which the
Bank's business is conducted.
. FIRST HAWAIIAN DEALER CENTER, INC.
First Hawaiian Dealer Center, Inc. was organized to engage in the
business of automobile financing and related business activities.
PIONEER FEDERAL SAVINGS BANK
Pioneer is a federally chartered savings bank headquartered in Honolulu,
Hawaii. Pioneer, chartered in 1890, currently conducts its business through 19
full-service offices located throughout the four major islands of the State of
Hawaii.
Pioneer's principal business consists of attracting deposits from the
general public through a variety of deposit products. The deposits are insured
by the Savings Association Insurance Fund of the FDIC to the extent, and
subject to the limitations, set forth in the Act. The deposits, together with
borrowings, principally from the Federal Home Loan Bank (the "FHLB") of
Seattle, and funds from ongoing operations, are used in the origination of
one-to-four family residential mortgage loans and, to a lesser extent, consumer
loans and other mortgage loans.
FIRST HAWAIIAN CREDITCORP, INC.
First Hawaiian Creditcorp, Inc. ("Creditcorp") is a financial services loan
company operating in the State of Hawaii and in Guam.
The lending activities of Creditcorp are concentrated in both consumer and
commercial financing which are primarily collateralized by real estate.
The primary source of funds of Creditcorp is receiving savings and time
deposits. Deposits are insured by the FDIC to the extent, and subject to the
limitations, set forth in the Act.
Creditcorp has 12 branch offices located throughout the four major islands
of the State of Hawaii and a loan production office in Guam.
FIRST HAWAIIAN LEASING, INC.
First Hawaiian Leasing, Inc. is primarily engaged in commercial equipment and
vehicle leasing and financing and is also licensed as a financial services loan
company in the State of Hawaii.
FHI INTERNATIONAL, INC.
FHI International, Inc. was organized to engage and/or invest in consumer
financing services and related activities outside the United States.
14
4
COMMON STOCK INFORMATION First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
The common stock of the Company is traded on The Nasdaq Stock Market under the
symbol FHWN. As of December 31, 1994, there were 5,093 holders of record of the
Company's common stock. A large number of shares are also held in the names of
nominees and brokers for individuals and institutions.
At December 31, 1994, the Company had 516,623 shares of common stock in
the treasury stock account. These shares were primarily purchased for issuance
under the Company's Incentive Plan for Key Executives and Stock Incentive Plan.
Additional information on these plans is provided in Note 11 to the Financial
Statements. Future purchases will be dependent upon the requirements of the
aforementioned plans and/or authorization by the Board of Directors in
appropriate circumstances. These purchases are not expected to have any
material effect on the Company's financial position or results of operations.
On December 1, 1993, the Bank purchased certain assets and assumed certain
liabilities of GKN, Inc., which did business as Phoenix Financial Services, at
a purchase price of $1,000,000 in the form of an exchange for 41,186
newly-issued shares of common stock of the Company.
On August 27, 1992, the Company entered into a merger agreement with
Finance Investment Company, Limited whereby the Company acquired FH Center,
Inc. and its parcel of land in exchange for 423,077 newly-issued shares of the
Company's common stock.
A compilation of certain quarterly and annual per share data is presented
below:
- -------------------------------------------------------------------------------
Market Price
Net Dividends --------------------------
Income Paid High Low Close
- -------------------------------------------------------------------------------
1994
FIRST QUARTER $ .58 $ .295 $27 1/4 $24 1/4 $26 1/4
SECOND QUARTER .59 .295 28 1/2 25 1/2 28 1/2
THIRD QUARTER .61 .295 31 1/4 28 28
FOURTH QUARTER .47 .295 28 3/4 23 23 3/4
- ----------------------------------------------
ANNUAL $ 2.25 $1.180 31 1/4 23 23 3/4
==============================================
1993
First Quarter $ .67 $ .28 30 1/4 26 3/4 30 1/4
Second Quarter .68 .28 30 3/4 26 1/2 28
Third Quarter .57 .28 29 1/2 27 27 1/2
Fourth Quarter .60 .295 28 23 3/4 24 3/4
- ----------------------------------------------
Annual $ 2.52 $1.135 30 3/4 23 3/4 24 3/4
==============================================
1992 $ 2.70 $1.06 29 3/4 23 1/2 28 3/4
1991 $ 2.55 $ .95 31 1/4 17 3/4 27 3/4
1990 $ 2.45 $ .83 25 3/4 14 1/2 19 3/4
================================================================================
The Company expects to continue its policy of paying quarterly cash dividends.
The declaration and payment of cash dividends are subject to the Company's
future earnings, capital requirements, financial condition and certain
limitations as described in Note 10 to the Financial Statements.
15
5
SUMMARY OF SELECTED CONSOLIDATED First Hawaiian, Inc. and Subsidiaries
FINANCIAL DATA
- -------------------------------------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990
- -------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENTS AND DIVIDENDS
(in thousands)
Net interest income $296,072 $278,222 $268,791 $252,976 $215,532
Provision for loan and lease losses 22,922 13,262 12,812 10,252 9,077
Other operating income 86,672 79,587 69,597 61,963 48,647
Other operating expenses 248,321 225,442 197,696 184,487 150,562
Income taxes 38,990 40,898 40,980 38,490 33,068
- -------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect
of a change in accounting principle 72,511 78,207 86,900 81,710 71,472
Cumulative effect of a change
in accounting principle -- 3,650 -- -- --
- -------------------------------------------------------------------------------------------------------------------------
Net income $ 72,511 $ 81,857 $ 86,900 $ 81,710 $ 71,472
=========================================================================================================================
Cash dividends $ 38,008 $ 36,821 $ 34,161 $ 30,395 $ 24,463
=========================================================================================================================
COMMON STOCK DATA
Per share:
Income before cumulative effect
of a change in accounting principle $ 2.25 $ 2.41 $ 2.70 $ 2.55 $ 2.45
Net income 2.25 2.52 2.70 2.55 2.45
Cash dividends 1.18 1.135 1.06 .95 .83
Book value (at December 31) 19.61 18.69 17.30 15.53 13.93
Market price (close at December 31) 23.75 24.75 28.75 27.75 19.75
Average shares outstanding (in thousands) 32,259 32,505 32,225 32,079 29,175
BALANCE SHEETS (in millions)
Average balances:
Total assets $7,200 $6,755 $6,537 $6,007 $5,292
Total earning assets 6,558 6,106 5,966 5,538 4,922
Loans and leases 5,172 4,619 4,358 3,837 3,032
Deposits 5,082 5,069 5,084 5,159 4,686
Stockholders' equity 618 584 526 470 352
At December 31:
Total assets 7,535 $7,269 $6,553 $6,511 $5,509
Loans and leases 5,534 5,067 4,396 4,329 3,262
Deposits 5,152 5,220 5,088 5,337 4,777
Long-term debt 219 222 71 62 50
Stockholders' equity 628 608 562 498 447
SELECTED RATIOS
Return on average:
Total assets 1.01% 1.21% 1.33% 1.36% 1.35%
Total stockholders' equity 11.73 14.01 16.52 17.38 20.29
Dividend payout ratio 52.44 45.04 39.26 37.25 33.88
Average stockholders' equity
to average total assets 8.58 8.65 8.05 7.82 6.66
Year ended December 31:
Net interest margin 4.63 4.69 4.62 4.74 4.59
Net loans and leases charged off to
average loans and leases .46 .27 .27 .13 .11
At December 31:
Tier 1 leverage ratio 7.51 7.45 7.72 6.80 8.23
Risk-based capital ratios:
Tier 1 9.31 9.80 10.49 9.03 11.40
Total 12.06 12.84 11.67 10.17 12.42
Allowance for loan and lease losses to
total loans and leases 1.11 1.23 1.28 1.27 1.22
Nonperforming assets to total loans
and leases and other real estate owned 1.14 1.44 1.65 .90 .09
Allowance for loan and lease losses to
nonperforming loans and leases 1.04x 1.03x .79x 1.49x 25.19x
=========================================================================================================================
16
6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF First Hawaiian, Inc. and Subsidiaries
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
OVERVIEW
The Company recorded consolidated net income for 1994 of $72,511,000, a
decrease of 11.4% from $81,857,000 for 1993. Net income per share for 1994 was
$2.25 compared to $2.52 for 1993.
The lower net income for 1994 was primarily due to a higher provision for
loan and lease losses of approximately $9,700,000 attributable to the write-off
of certain problem loans and a nonrecurring charge of $5,000,000 to cover
estimated losses attributable to investments made in the trust area that were
outside of the clients' express investment guidelines. In addition, net income
for 1993 included a nonrecurring income tax benefit of $3,650,000 attributable
to an income tax accounting change and the $5,444,000 write-off of the
undepreciated cost of certain structures in connection with the Company's
redevelopment of its former downtown headquarters block.
Net income for 1993 decreased by $5,043,000, or 5.8%, as compared to 1992,
reflecting a slowdown in earnings growth caused by the economic recession in
Hawaii.
The Company's return on average total assets for 1994 was 1.01% compared
to 1.21% for 1993 and 1.33% for 1992. This rate of return has averaged 1.25%
for the last five years.
For 1994, the return on average stockholders' equity was 11.73% compared
to 14.01% for 1993 and 16.52% for 1992. This rate of return has averaged 15.99%
for the last five years.
The Company's asset quality measures improved from 1993 to 1994, with
nonperforming assets decreasing to 1.14% of total loans and leases and other
real estate owned from 1.44% in 1993. Net charge-offs to average loans and
leases increased to .46% for 1994 from .27% for 1993.
The Company's continued commitment to tight expense controls has kept its
overhead expense levels below that of its peer group. The Company's efficiency
ratio (consisting of other operating expenses as a percentage of total
operating revenue and exclusive of nonrecurring items) was 62.4% for 1994,
60.4% for 1993 and 57.3% for 1992.
At December 31, 1994, the Company's ratios of Tier 1 Capital to
risk-weighted assets and Total Capital to risk-weighted assets were 9.31% and
12.06%, respectively, compared with 9.80% and 12.84%, respectively, at December
31, 1993. These ratios are well in excess of the minimum ratios of 4.00% and
8.00%, respectively, specified by the Board of Governors of the Federal Reserve
System.
RECENT ACQUISITION
On August 6, 1993, the Company acquired Pioneer, a federal savings bank, with
$604 million in total assets at the time of acquisition ($760 million as of
December 31, 1994). The acquisition was accounted for under the purchase method
and, accordingly, is included in the Company's consolidated financial
statements from the date of acquisition.
[EARNINGS AND CASH DIVIDENDS PER SHARE CHART]
[RETURN ON AVERAGE TOTAL ASSETS CHART]
[RETURN ON AVERAGE STOCKHOLDERS' EQUITY CHART]
17
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF First Hawaiian, Inc. and Subsidiaries
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
- --------------------------------------------------------------------------------
NET INTEREST INCOME
As reflected in Table 1, net interest income, on a taxable equivalent basis,
increased $17,031,000, or 5.9%, from $286,393,000 in 1993 to $303,424,000 in
1994. This increase was due to the 7.4% increase in average earning assets
(principally as a result of the Pioneer acquisition), offset by a 6 basis point
(1% equals 100 basis points) decrease in the net interest margin. Net interest
income increased by $10,605,000, or 3.8%, from 1992 to 1993 due to the 2.3%
increase in average earning assets (principally as a result of the Pioneer
acquisition) and a 7 basis point increase in the net interest margin.
Tables 1 and 2 present an analysis of the components and changes in net
interest income for 1994, 1993 and 1992.
In 1994, as a result of increases in prevailing interest rates, the yield
on average earning assets increased 21 basis points and the rate paid for
sources of funds used for such earning assets increased 27 basis points, which
resulted in a decrease in the net interest margin from 4.69% to 4.63%.
In 1993, the yield on average earning assets decreased 93 basis points and
the rate paid for the sources of funds used for such earning assets decreased
100 basis points, which resulted in an increase in the net interest margin from
4.62% to 4.69%. The increase in the net interest margin was primarily
attributable to the lower interest rate on savings accounts. In 1991, the Bank
committed to pay a rate of 5.5% through December 1, 1992 on all savings
accounts opened before December 1, 1991. Upon the expiration of this
commitment, rates on these savings accounts declined to market rates. As a
result, the average interest rate paid on the Company's savings accounts
declined from 4.24% in 1992 to 2.04% in 1993.
Average earning assets increased by $452,160,000, or 7.4%, in 1994 over
1993. In addition, the mix of earning assets changed slightly, as the Company
increased the amount of higher-yielding loans and leases in its portfolio, from
76% of total earning assets in 1993 to 79% in 1994. Average loans and leases
increased by $552,739,000, or 12.0%, from 1993 to 1994, principally as a result
of the Pioneer acquisition.
Average earning assets increased by $139,586,000, or 2.3%, in 1993 over
1992. In addition, the mix of earning assets changed slightly, as the Company
increased the amount of higher-yielding loans and leases in its portfolio, from
73% of total earning assets in 1992 to 76% in 1993, and reduced the amount of
investment securities from 20% of total earning assets in 1992 to 18% in 1993.
Average loans and leases increased by $261,038,000, or 6.0%, from 1992 to
1993, principally as a result of the Pioneer acquisition.
During 1994, average interest-bearing deposits and liabilities increased
by $469,993,000, or 9.2%, over 1993, principally as a result of the Pioneer
acquisition. As reflected in Table 2, the increase in total interest expense of
$28,979,000 from 1993 to 1994 was comprised of an increase of $23,624,000 due
to higher average balances and an increase of $5,355,000 due to higher interest
rates.
Average interest-bearing deposits and liabilities increased by $81,125,000,
or 1.6%, from 1992 to 1993, principally as a result of the acquisition of
Pioneer's deposits and related interest-bearing liabilities and the issuance of
$100,000,000 of subordinated notes to finance the acquisition of Pioneer.
[NET INTEREST INCOME CHART]
[AVERAGE EARNING ASSETS CHART]
18
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF First Hawaiian, Inc. and Subsidiaries
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
- -------------------------------------------------------------------------------
TABLE 1: AVERAGE BALANCES, INTEREST INCOME AND EXPENSE, AND YIELDS AND RATES
(TAXABLE EQUIVALENT BASIS)
The following table sets forth the condensed consolidated average balance
sheets, an analysis of interest income/expense and average yield/rate for each
major category of earning assets and interest-bearing deposits and liabilities
for the years indicated on a taxable equivalent basis. The tax equivalent
adjustment is made for items exempt from Federal income taxes (assuming a 35%
tax rate for 1994 and 1993 and 34% for 1992) to make them comparable with
taxable items before any income taxes are applied.
1994 1993 1992
------------------------------ ---------------------------- -----------------------------
INTEREST Interest Interest
AVERAGE INCOME/ YIELD/ Average Income/ Yield/ Average Income/ Yield/
(dollars in thousands) BALANCE EXPENSE RATE Balance Expense Rate Balance Expense Rate
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS
Earning assets:
Interest-bearing deposits
in other banks:
Domestic $ 12,078 $ 615 5.09% $ 21,098 $ 633 3.00% $ 12,316 $ 729 5.92%
Foreign 55,214 2,011 3.64 211,543 6,666 3.15 194,020 9,537 4.92
- ------------------------------------------------------- --------------------- ---------------------
Total interest-
bearing deposits
in other banks 67,292 2,626 3.90 232,641 7,299 3.14 206,336 10,266 4.98
- ------------------------------------------------------- --------------------- ---------------------
Federal funds sold and
securities purchased under
agreements to resell 127,821 5,179 4.05 160,647 5,097 3.17 235,890 8,323 3.53
Held-to-maturity securities:
U.S. Treasury and other
U.S. Government
agencies and
corporations 803,544 34,530 4.30 803,096 39,537 4.92 840,485 57,715 6.87
States and political
subdivisions 163,769 9,874 6.03 184,678 9,988 5.41 193,870 10,707 5.52
Other 95,793 5,574 5.82 54,476 3,879 7.12 131,186 8,246 6.29
- ------------------------------------------------------- --------------------- ---------------------
Total held-to-maturity
securities 1,063,106 49,978 4.70 1,042,250 53,404 5.12 1,165,541 76,668 6.58
- ------------------------------------------------------- --------------------- ---------------------
Available-for-sale
securities 127,517 6,354 4.98 50,777 1,950 3.84 -- -- --
Loans and leases:(1) (2)
Domestic 4,953,951 400,003 8.07 4,412,653 352,045 7.98 4,126,715 367,653 8.91
Foreign 218,189 18,972 8.69 206,748 17,307 8.37 231,648 19,661 8.49
- ------------------------------------------------------- --------------------- ---------------------
Total loans
and leases 5,172,140 418,975 8.10 4,619,401 369,352 8.00 4,358,363 387,314 8.89
- ------------------------------------------------------- --------------------- ---------------------
TOTAL EARNING ASSETS 6,557,876 483,112 7.37 6,105,716 437,102 7.16 5,966,130 482,571 8.09
- ------------------------------------------------------- --------------------- ---------------------
Cash and due from banks 265,103 298,765 298,818
Premises and equipment 250,391 230,547 174,288
Core deposit premium 14,588 13,156 11,903
Goodwill 79,178 67,678 57,441
Other assets 33,077 39,390 28,021
- ------------------------------------------- ---------- ----------
TOTAL ASSETS $7,200,213 $6,755,252 $6,536,601
=========================================== ========== ==========
Notes:
(1) Nonaccruing loans and leases have been included in the computations of
average loan and lease balances.
(2) Interest income for loans and leases includes loan fees of $29,317, $25,145
and $28,725 for 1994, 1993 and 1992, respectively.
19
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF First Hawaiian, Inc. and Subsidiaries
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
- --------------------------------------------------------------------------------
1994 1993 1992
----------------------------- ---------------------------- -----------------------------
INTEREST Interest Interest
AVERAGE INCOME/ YIELD/ Average Income/ Yield/ Average Income/ Yield/
(dollars in thousands) BALANCE EXPENSE RATE Balance Expense Rate Balance Expense Rate
- ------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing deposits
and liabilities:
Deposits:
Interest-bearing demand $1,127,076 $ 24,282 2.15% $1,212,630 $ 26,036 2.15% $1,182,870 $ 34,858 2.95%
Savings 1,230,660 25,545 2.08 1,395,859 28,528 2.04 1,285,884 54,578 4.24
Time 1,640,932 62,675 3.82 1,407,310 58,509 4.16 1,584,905 79,566 5.02
Foreign (interest-bearing) 207,655 7,787 3.75 127,830 3,814 2.98 161,196 6,813 4.23
- ------------------------------------------------------------ --------------------- --------------------
Total interest-bearing
deposits 4,206,323 120,289 2.86 4,143,629 116,887 2.82 4,214,855 175,815 4.17
Short-term borrowings 1,136,361 47,813 4.21 814,843 26,477 3.25 723,731 26,622 3.68
Long-term debt 213,286 11,586 5.43 127,505 7,345 5.76 66,266 4,346 6.56
- ------------------------------------------------------------ --------------------- --------------------
TOTAL INTEREST-BEARING
DEPOSITS AND LIABILITIES 5,555,970 179,688 3.23 5,085,977 150,709 2.96 5,004,852 206,783 4.13
- ------------------------------------------------------------ --------------------- --------------------
Noninterest-bearing
demand deposits 875,907 925,497 869,025
Other liabilities 149,922 159,403 136,849
- -------------------------------------------------- ---------- ----------
Total liabilities 6,581,799 6,170,877 6,010,726
Stockholders' equity 618,414 584,375 525,875
- -------------------------------------------------- ---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $7,200,213 $6,755,252 $6,536,601
================================================== ========== ==========
NET INTEREST INCOME AND
MARGIN ON EARNING ASSETS 303,424 4.63% 286,393 4.69% 275,788 4.62%
Tax equivalent adjustment 7,352 8,171 6,997
- -------------------------------------------------- -------- -------- --------
NET INTEREST INCOME $296,072 $278,222 $268,791
====================================================================================================================================
20
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF First Hawaiian, Inc. and Subsidiaries
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
- --------------------------------------------------------------------------------
TABLE 2: ANALYSIS OF CHANGES IN NET INTEREST INCOME (TAXABLE EQUIVALENT BASIS)
The following table analyzes the dollar amount of change (on a taxable
equivalent basis) in interest income and expense and the changes in dollar
amounts attributable to (a) changes in volume (change in volume times prior
year's rates), (b) changes in rates (change in rate times prior year's volume),
and (c) changes in rate/volume (change in rate times change in volume). In this
table, the dollar change in rate/volume is prorated to volume and rate
proportionately. The tax equivalent adjustment is made for items exempt from
Federal income taxes (assuming a 35% tax rate for 1994 and 1993 and 34% for
1992) to make them comparable with taxable items before any income taxes are
applied.
1994 COMPARED TO 1993-- 1993 Compared to 1992--
INCREASE (DECREASE) DUE TO: Increase (Decrease) Due to:
------------------------------------ ---------------------------------
NET INCREASE Net Increase
(in thousands) VOLUME RATE (DECREASE) Volume Rate (Decrease)
- -----------------------------------------------------------------------------------------------------------------
Interest earned on:
Interest-bearing deposits
in other banks:
Domestic $ (494) $ 476 $ (18) $ 332 $ (428) $ (96)
Foreign (5,325) 670 (4,655) 800 (3,671) (2,871)
- -----------------------------------------------------------------------------------------------------------------
Total interest-bearing
deposits in other banks (5,819) 1,146 (4,673) 1,132 (4,099) (2,967)
- -----------------------------------------------------------------------------------------------------------------
Federal funds sold and
securities purchased under
agreements to resell (1,164) 1,246 82 (2,451) (775) (3,226)
Held-to-maturity securities:
U.S. Treasury and other
U.S. Government agencies
and corporations 22 (5,029) (5,007) (2,469) (15,709) (18,178)
States and political
subdivisions (1,195) 1,081 (114) (500) (219) (719)
Other 2,509 (814) 1,695 (5,344) 977 (4,367)
- -----------------------------------------------------------------------------------------------------------------
Total held-to-maturity securities 1,336 (4,762) (3,426) (8,313) (14,951) (23,264)
- -----------------------------------------------------------------------------------------------------------------
Available-for-sale securities 3,680 724 4,404 1,950 -- 1,950
Loans and leases:(1)
Domestic 43,660 4,298 47,958 24,413 (40,021) (15,608)
Foreign 980 685 1,665 (2,088) (266) (2,354)
- -----------------------------------------------------------------------------------------------------------------
Total loans and leases 44,640 4,983 49,623 22,325 (40,287) (17,962)
- -----------------------------------------------------------------------------------------------------------------
Total earning assets 42,673 3,337 46,010 14,643 (60,112) (45,469)
- -----------------------------------------------------------------------------------------------------------------
Interest paid on:
Deposits:
Interest-bearing demand (1,843) 89 (1,754) 857 (9,679) (8,822)
Savings (3,422) 439 (2,983) 4,325 (30,375) (26,050)
Time 9,182 (5,016) 4,166 (8,330) (12,727) (21,057)
Foreign (interest-bearing) 2,815 1,158 3,973 (1,239) (1,760) (2,999)
- -----------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 6,732 (3,330) 3,402 (4,387) (54,541) (58,928)
Short-term borrowings 12,210 9,126 21,336 3,148 (3,293) (145)
Long-term debt 4,682 (441) 4,241 3,584 (585) 2,999
- -----------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits
and liabilities 23,624 5,355 28,979 2,345 (58,419) (56,074)
- -----------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN
NET INTEREST INCOME
(TAXABLE EQUIVALENT BASIS) $ 19,049 $(2,018) $ 17,031 $ 12,298 $ (1,693) $ 10,605
=================================================================================================================
Note:
(1) Interest income for loans and leases included loan fees of $29,317,
$25,145 and $28,725 for 1994, 1993 and 1992, respectively.
21
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF First Hawaiian, Inc. and Subsidiaries
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
- --------------------------------------------------------------------------------
OTHER OPERATING INCOME
Total other operating income increased $7,085,000, or 8.9%, from $79,587,000 in
1993 to $86,672,000 in 1994.
Trust fees increased $1,446,000, or 6.8%, from 1993 to 1994 and increased
$3,230,000, or 17.8%, from 1992 to 1993. These increases were primarily the
result of increases in fees from pension plans and irrevocable trusts and
investment management fees which were the result of new business. In addition,
the increase in investment management fees from 1992 to 1993 was the result of
the performance of the stock market which increased the value of assets under
management.
Service charges on deposit accounts increased $2,223,000, or 10.2%, from
1993 to 1994 and increased $3,468,000, or 18.9%, from 1992 to 1993. These
increases were primarily attributable to increases in fees and service charges
on checking accounts by Pioneer.
Other service charges and fees increased $4,277,000, or 15.5%, from 1993
to 1994 and increased $1,302,000, or 4.9%, from 1992 to 1993. These increases
were primarily the result of fee income from loan servicing and credit cards,
miscellaneous commissions and the Pioneer acquisition.
Securities gains, net decreased $1,777,000, or 90.9%, from 1993 to 1994
and increased $1,794,000, or 1,114.3%, from 1992 to 1993. The Company sold its
Fannie Mae and Sallie Mae stocks and recognized a gain of $1,873,000 in 1993.
Components of and changes in other operating income are reflected below for the
years indicated:
- ---------------------------------------------------------------------------------------------------------------
1994/93 CHANGE 1993/92 Change
---------------- -------------------
(in thousands) 1994 1993 1992 AMOUNT % Amount %
- ---------------------------------------------------------------------------------------------------------------
Trust income $22,847 $21,401 $18,171 $ 1,446 6.8% $3,230 17.8%
Service charges on deposit
accounts 24,014 21,791 18,323 2,223 10.2 3,468 18.9
Other service charges and fees 31,937 27,660 26,358 4,277 15.5 1,302 4.9
Securities gains, net 178 1,955 161 (1,777) (90.9) 1,794 1,114.3
Other 7,696 6,780 6,584 916 13.5 196 3.0
- ------------------------------------------------------------------------------ ------
TOTAL OTHER OPERATING INCOME $86,672 $79,587 $69,597 $7,085 8.9% $9,990 14.4%
===============================================================================================================
PROVISION AND ALLOWANCE FOR LOAN AND LEASE LOSSES
The provision for loan and lease losses is based upon management's judgment as
to the adequacy of the allowance to absorb future losses. In assessing the
adequacy of the allowance for loan and lease losses, management's methodology
takes into consideration the Company's historical loan loss experience, value
and adequacy of collateral, level of nonperforming (nonaccrual and
renegotiated) loans and leases, loan concentrations, the growth and composition
of the portfolio, review of monthly delinquency reports, results of
examinations of individual loans and leases and/or evaluation of the overall
portfolio by senior credit personnel, internal auditors, and Federal and State
regulatory agencies and general economic conditions. This assessment is
performed on a quarterly basis.
The provision for loan and lease losses for 1994 was $22,922,000, an
increase of 72.8%, or $9,660,000 over 1993, primarily due to $10,955,000 of
charge-offs relating to two Shared National Credits (a commercial loan of
$3,551,000 and a Hawaii real estate construction loan of $1,964,000) and a
commercial loan of $5,440,000. Net charge-offs in 1994 totalled $23,925,000
compared to $12,619,000 in 1993. Net charge-offs in 1994 and 1993 represented
.46% and .27%, respectively, of average outstanding loans and leases.
At December 31, 1994, the allowance for loan and lease losses totalled
$61,250,000 and represented 1.11% of total outstanding loans and leases
compared to $62,253,000 and 1.23% as of December 31, 1993.
The provision for loan and lease losses in 1993 was $13,262,000, a modest
increase of 3.5%, or $450,000, compared to 1992, reflecting the decline in
nonperforming assets and stable trend in net charge-offs from 1992 to 1993. Net
charge-offs in 1993 totalled $12,619,000 compared to $11,561,000 in 1992.
22
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF First Hawaiian, Inc. and Subsidiaries
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
- --------------------------------------------------------------------------------
The following sets forth the activity in the allowance for loan and lease
losses for the years indicated:
- -----------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1994 1993 1992 1991 1990
- -----------------------------------------------------------------------------------------------------------------
Loans and leases outstanding (end of year) $5,533,565 $5,066,809 $4,396,018 $4,329,321 $3,262,000
=================================================================================================================
Average loans and leases outstanding $5,172,140 $4,619,401 $4,358,363 $3,836,844 $3,032,000
=================================================================================================================
Allowance for loan and lease losses:
Balance at beginning of year $ 62,253 $ 56,385 $ 55,134 $ 39,847 $ 34,154
Allowance applicable to loans
of purchased company(1) -- 5,225 -- 10,141 --
Loans and leases charged off:
Commercial, financial and agricultural 11,307 3,004 2,110 758 167
Real estate:
Construction 7,178 4,506 3,932 -- --
Commercial 1,500 125 250 294 200
Residential 588 562 -- -- 13
Consumer 6,542 6,839 7,093 5,481 3,461
Lease financing -- 27 25 -- 67
Foreign -- -- -- -- 570
- -----------------------------------------------------------------------------------------------------------------
Total loans and leases charged off 27,115 15,063 13,410 6,533 4,478
- -----------------------------------------------------------------------------------------------------------------
Recoveries on loans and leases
previously charged off:
Commercial, financial and agricultural 1,229 235 349 313 308
Real estate:
Construction 205 -- -- 1 --
Commercial 9 321 1 42 21
Residential 92 207 35 -- 46
Consumer 1,639 1,667 1,456 1,066 713
Lease financing 16 14 8 5 6
- -----------------------------------------------------------------------------------------------------------------
Total recoveries on loans and leases
previously charged off 3,190 2,444 1,849 1,427 1,094
- -----------------------------------------------------------------------------------------------------------------
Net charge-offs (23,925) (12,619) (11,561) (5,106) (3,384)
Provision charged to expense 22,922 13,262 12,812 10,252 9,077
- -----------------------------------------------------------------------------------------------------------------
BALANCE AT END OF YEAR $ 61,250 $ 62,253 $ 56,385 $ 55,134 $ 39,847
=================================================================================================================
Net loans and leases charged off
to average loans and leases .46% .27% .27% .13% .11%
Net loans and leases charged off to
allowance for loan and lease losses 39.06% 20.27% 20.50% 9.26% 8.49%
Allowance for loan and lease losses to
total loans and leases (end of year) 1.11% 1.23% 1.28% 1.27% 1.22%
Allowance for loan and lease losses to
nonperforming loans and leases:
Excluding past due loans and leases 1.04x 1.03x .79x 1.49x 25.19x
Including past due loans and leases .66x .62x .44x .86x 4.36x
=================================================================================================================
Note:
(1) Allowances of $5,225 and $10,141 in 1993 and 1991, respectively, were
related to the acquisition of Pioneer Federal Savings Bank and First
Interstate of Hawaii, Inc. and its primary, wholly-owned subsidiary, First
Interstate Bank of Hawaii, respectively.
23
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF First Hawaiian, Inc. and Subsidiaries
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
- --------------------------------------------------------------------------------
The Company has allocated a portion of the allowance for loan and lease losses
according to the amount deemed to be reasonably necessary to provide for the
possibility of losses being incurred within the various loan and lease
categories as of December 31 for the years indicated:
- --------------------------------------------------------------------------------------------------------------------
1994 1993 1992
-------------------------- -------------------------- --------------------------
PERCENT OF Percent of Percent of
LOANS/LEASES Loans/Leases Loans/Leases
IN EACH in Each in Each
CATEGORY Category Category
ALLOWANCE TO TOTAL Allowance to Total Allowance to Total
(in thousands) AMOUNT LOANS/LEASES Amount Loans/Leases Amount Loans/Leases
- --------------------------------------------------------------------------------------------------------------------
Domestic:
Commercial, financial
and agricultural $16,610 24% $13,000 24% $14,700 27%
Real estate:
Construction 7,010 6 11,850 7 4,400 10
Commercial 4,700 18 3,400 17 5,400 16
Residential 9,510 36 4,700 35 3,000 28
Consumer 8,040 8 7,500 9 7,100 10
Lease financing 600 4 1,350 4 1,300 4
Foreign 1,085 4 1,600 4 1,700 5
General allowance 13,695 N/A 18,853 N/A 18,785 N/A
- --------------------------------------------------------------------------------------------------------------------
CONSOLIDATED $61,250 100% $62,253 100% $56,385 100%
====================================================================================================================
- -------------------------------------------------------------------------------------
1991 1990
-------------------------- --------------------------
Percent of Percent of
Loans/Leases Loans/Leases
in Each in Each
Category Category
Allowance to Total Allowance to Total
(in thousands) Amount Loans/Leases Amount Loans/Leases
- -------------------------------------------------------------------------------------
Domestic:
Commercial, financial
and agricultural $14,335 26% $10,282 27%
Real estate:
Construction 7,719 11 5,648 9
Commercial 1,785 17 1,394 17
Residential 2,626 25 1,722 21
Consumer 7,121 11 3,710 14
Lease financing 1,367 5 1,431 5
Foreign 500 5 1,153 7
General allowance 19,681 N/A 14,507 N/A
- -------------------------------------------------------------------------------------
CONSOLIDATED $55,134 100% $39,847 100%
=====================================================================================
[ALLOWANCE AS A % OF LOANS AND LEASES OUTSTANDING CHART]
[YEAR-END ALLOWANCE FOR LOAN AND LEASE LOSSES CHART]
In May, 1993, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 114, "Accounting by
Creditors for Impairment of a Loan," which requires that impaired loans be
measured based on the present value of expected future cash flows discounted at
the loan's effective interest rate or the market price or fair value of the
collateral if the loan is collateral dependent. SFAS No. 114 is effective for
fiscal years beginning after December 15, 1994. The adoption of SFAS No. 114 is
not expected to have a material effect on the Company's financial position or
results of operations.
OTHER OPERATING EXPENSES
Total other operating expenses for 1994 totalled $248,321,000, an increase of
$22,879,000, or 10.1%, from 1993.
Total personnel expenses for 1994 increased $7,927,000, or 7.2%, over 1993.
Salaries and wages increased $6,226,000, or 7.2%, reflecting normal merit
increases and increased staff levels, and higher workers' compensation, health
and payroll tax expenses partly as a result of the Pioneer acquisition in
August, 1993.
Occupancy expense increased $2,864,000, or 14.0%, over 1993 as a result of
higher rental expense, partly as a result of the Pioneer acquisition.
Equipment expense increased $4,569,000, or 22.6%, over 1993 primarily as a
result of higher depreciation, rental expense and maintenance service contracts
in connection with the migration from a Unisys to IBM information technology
platform and improvements in the delivery and processing systems.
Deposit insurance expense increased a modest $266,000, or 2.4%, over 1993
as the Company continued to shift public deposits into security repurchase
agreements which has resulted in annual savings in excess of $1,930,000.
In 1994, the Company recognized a nonrecurring charge of $5,000,000 to
cover estimated losses attributable to investments made in the trust area that
were outside of the clients' express investment guidelines.
Other expenses increased $6,238,000, or 14.8%, over 1993 primarily as a
result of a loss of $1,409,000 on the disposition of certain other real estate
owned,
24
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF First Hawaiian, Inc. and Subsidiaries
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
- --------------------------------------------------------------------------------
higher outside services, utility charges and professional fees, the Pioneer
acquisition and lower interest capitalization on construction in progress.
Other operating expenses increased $27,746,000, or 14.0%, from 1992 to
1993. This increase was primarily due to higher personnel expenses and rental
expenses, partly as a result of the Pioneer acquisition, higher depreciation,
rental expense and maintenance service contracts in connection with the
conversion of the computer mainframes and improvements in the delivery and
processing systems and the write-off of $5,444,000 for the undepreciated cost
of certain structures on the Company's redevelopment block.
Components of and changes in other operating expenses are reflected below for
the years indicated:
- -----------------------------------------------------------------------------------------------
1994/93 CHANGE 1993/92 Change
---------------- --------------
(in thousands) 1994 1993 1992 AMOUNT % Amount %
- -----------------------------------------------------------------------------------------------
Personnel:
Salaries and wages $ 92,237 $ 86,011 $ 80,320 $ 6,226 7.2% $ 5,691 7.1%
Employee benefits 26,484 24,783 21,954 1,701 6.9 2,829 12.9
- -------------------------------------------------------------------- -------
Total personnel expenses 118,721 110,794 102,274 7,927 7.2 8,520 8.3
Occupancy expense 23,280 20,416 17,021 2,864 14.0 3,395 19.9
Equipment expense 24,812 20,243 18,522 4,569 22.6 1,721 9.3
Deposit insurance 11,388 11,122 11,122 266 2.4 -- --
Stationery and supplies 9,055 8,430 8,922 625 7.4 (492) (5.5)
Advertising and promotion 7,745 6,911 6,326 834 12.1 585 9.2
Trust loss 5,000 -- -- 5,000 -- -- --
Write-off of building costs -- 5,444 -- (5,444) (100.0) 5,444 --
Other 48,320 42,082 33,509 6,238 14.8 8,573 25.6
- ------------------------------------------------------------------- -------
TOTAL OTHER OPERATING
EXPENSES $248,321 $225,442 $197,696 $22,879 10.1% $27,746 14.0%
================================================================================================
Effective January 1, 1994, the Company adopted SFAS No. 112, "Employer's
Accounting for Postretirement Benefits," which requires that the estimated cost
of benefits provided by an employer to former or inactive employees after
employment, but before retirement, be accounted for on an accrual basis. The
adoption of SFAS No. 112 did not have a material effect on the consolidated
financial statements of the Company.
Effective January 1, 1993, the Company adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," which changed the
practice of accounting for postretirement benefits from a cash basis to an
accrual basis during the years that the employee renders the necessary service.
The Company had been accounting for postretirement medical benefits on an
accrual basis. As a result, the adoption of SFAS No. 106 did not have a
material effect on the consolidated financial statements of the Company.
INCOME TAXES
The provision for income taxes as shown in the Consolidated Statements of
Income represents 35.0% of pre-tax income for 1994, compared with 34.3% and
32.0% for 1993 and 1992, respectively.
On a taxable equivalent basis, the effective tax rate for 1994, 1993 and
1992 was 41.6%, 38.6% and 35.6%, respectively. Additional information on the
Company's income taxes is provided in Note 13 to the Financial Statements.
Effective January 1, 1993, the Company adopted SFAS No. 109, "Accounting
for Income Taxes," the cumulative effect of which was the recognition of an
income tax benefit of $3,650,000 in the first quarter of 1993. Under SFAS No.
109, deferred tax assets and liabilities are measured using enacted tax rates
scheduled to be in effect at the time the related temporary differences between
financial reporting and tax reporting of income and expense are expected to
reverse. The effect of changes in tax rates is recognized in income in the
period that includes the enactment date. On August 10, 1993, the Omnibus Budget
Reconciliation Act of 1993 was signed into law, increasing the Federal
corporate tax rate from 34% to 35%, retroactive to January 1, 1993. As a
result, the Company recognized retroactive adjustments to its deferred tax
liability and current tax provision of $1,520,000 and $402,000, respectively,
in the third quarter of 1993.
25
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF First Hawaiian, Inc. and Subsidiaries
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
- --------------------------------------------------------------------------------
LOANS
The following table sets forth the loan portfolio by major categories and loan
mix as of December 31 for the years indicated:
- ---------------------------------------------------------------------------------------
(in millions) 1994 1993 1992 1991 1990
- ---------------------------------------------------------------------------------------
Domestic:
Commercial, financial and agricultural $1,307 $1,209 $1,175 $1,149 $ 883
Real estate:
Construction 321 317 438 484 283
Commercial 965 883 720 739 555
Residential 2,007 1,786 1,217 1,060 697
Consumer 309 312 326 355 364
Credit cards 159 148 148 142 104
Lease financing 231 201 171 181 149
Foreign:
Governments and official institutions 1 2 3 22 13
Commercial and industrial 50 79 78 74 79
Other 184 130 120 123 135
- ---------------------------------------------------------------------------------------
TOTAL LOANS AND LEASES $5,534 $5,067 $4,396 $4,329 $3,262
=======================================================================================
The loan and lease portfolio is the largest component of earning assets and
accounts for the greatest portion of total interest income. At December 31,
1994, total loans and leases were $5,533,565,000, an increase of 9.2% from
December 31, 1993, primarily in the real estate categories.
Total loans and leases at December 31, 1994, represented 73.4% of total
assets, 80.5% of total earning assets and 107.4% of total deposits compared to
69.7% of total assets, 78.6% of total earning assets and 97.1% of total
deposits at December 31, 1993. Governmental and certain other time deposits
were shifted into security repurchase agreements at December 31, 1994 and 1993
to reduce the Company's deposit insurance premiums. If these repurchase
agreements had been included in the deposit base, total loans and leases as a
percentage of total deposits would represent 92.6% and 83.8%, respectively, at
such dates.
The Company's real estate loans totalled $3,292,042,000, or 59.5% of total
loans at December 31, 1994 and represented an increase of 10.3% over December
31, 1993. The increase was primarily due to an increase in adjustable rate
mortgage loans in the Company's portfolio, as interest rates increased in 1994.
In 1993, the Company originated more fixed rate loans which were sold to
investors.
The Company's primary goal in real estate lending is to maintain reasonable
levels of risk by avoiding speculative real estate transactions, such as the
financing of raw land acquisitions, by adhering to underwriting guidelines and
by closely monitoring general economic conditions impacting local real estate
markets.
The Company's multifamily and commercial real estate loans, both
construction and permanent, are analyzed on the basis of the economic viability
of the specific project or property for which financing is sought as well as
the loan-to-value ratio of the real estate securing the financing and the
underlying financial strength of the borrower. In its multifamily and
commercial real estate lending the Company will generally not lend in excess of
75% of the appraised value of the underlying project or property; it generally
also requires a debt service ratio of 1.20. In its single family residential
lending, the Company will generally not lend in excess of 80% of the appraised
value of the underlying property. Loans made in excess of that limit are
generally covered by third party mortgage insurance that reduces the Company's
equivalent risk to an 80% loan to appraised value ratio.
Consumer loans consist primarily of automobile secured loans supported by
underwriting guidelines which management believes to be conservative and which
are based primarily on satisfactory credit history, down payment, and
sufficient income to service the monthly payments.
Loan concentrations are considered to exist when there are amounts loaned
to multiple borrowers engaged in similar activities which would cause them to
be similarly impacted by economic or other conditions. At December 31, 1994,
commercial real estate loans totalled $964,758,000, or 17.4%, of total loans
and leases. The increase in commercial real estate loans of $82,130,000, or
9.3%, from December 31, 1993 to December 31, 1994 was attributable to a
26
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF First Hawaiian, Inc. and Subsidiaries
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
- --------------------------------------------------------------------------------
favorable interest rate environment in 1993 which resulted in increased loan
commitments in 1993 and increased commercial real estate funding in 1994. While
the increased demand for money resulted in the increase of commercial real
estate loans in 1994, management believes that the rising interest rate
environment of 1994 will have a negative impact on 1995's commercial real
estate loan volume. The Company has selectively participated as a lender on
commercial properties on the mainland United States, principally on the west
coast. Such loans totalled $58,421,000 and $67,642,000 at December 31, 1994 and
1993, respectively. At December 31, 1994, the largest concentration of
commercial real estate loans to a single borrower was $28.9 million.
At December 31, 1994, commercial, financial and agricultural, real
estate -- construction and foreign loans with maturities over one year were
comprised of fixed rate loans totalling $96,599,000 and floating or adjustable
rate loans totalling $1,060,657,000.
NONPERFORMING ASSETS AND PAST DUE LOANS
Nonperforming assets and past due loans and leases are reflected below for the
years indicated:
- ---------------------------------------------------------------------------------------------------
(dollars in thousands) 1994 1993 1992 1991 1990
- ---------------------------------------------------------------------------------------------------
Nonperforming loans and leases:
Nonaccrual:
Commercial, financial and agricultural $ 7,972 $13,823 $24,563 $11,389 $ 504
Real estate:
Construction 7,038 28,571 41,018 23,298 --
Commercial 35,290 12,145 3,250 2,199 856
Residential:
Insured, guaranteed, or conventional 4,649 5,473 2,221 -- --
Home equity credit lines 520 255 269 -- --
- ---------------------------------------------------------------------------------------------------
Total real estate loans 47,497 46,444 46,758 25,497 856
Consumer 143 45 106 86 30
Lease financing 212 -- 27 -- --
- ---------------------------------------------------------------------------------------------------
Total nonaccrual loans and leases 55,824 60,312 71,454 36,972 1,390
Renegotiated:
Commercial real estate 3,128 -- -- -- --
Commercial, financial and agricultural -- 20 77 136 192
- ---------------------------------------------------------------------------------------------------
Total nonperforming loans and leases 58,952 60,332 71,531 37,108 1,582
Other real estate owned 4,160 13,034 1,211 1,811 1,248
- ---------------------------------------------------------------------------------------------------
TOTAL NONPERFORMING ASSETS $63,112 $73,366 $72,742 $38,919 $2,830
===================================================================================================
PAST DUE LOANS AND LEASES (1) $33,367 $40,285 $55,704 $26,726 $7,567
===================================================================================================
Nonperforming assets to total loans and leases
and other real estate owned (end of year):
Excluding past due loans and leases 1.14% 1.44% 1.65% .90% .09%
Including past due loans and leases 1.74% 2.24% 2.92% 1.52% .32%
Nonperforming assets to total assets (end of year):
Excluding past due loans and leases .84% 1.01% 1.11% .60% .05%
Including past due loans and leases 1.28% 1.56% 1.96% 1.01% .19%
===================================================================================================
Note:
(1) Represents loans and leases which are past due 90 days or more as to
principal or interest and which are still accruing interest.
27
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF First Hawaiian, Inc. and Subsidiaries
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
- --------------------------------------------------------------------------------
Nonperforming assets at December 31, 1994 were $63,112,000, or 1.14% of
total loans and leases and other real estate owned ("OREO") and .84% of total
assets. These levels compared to total nonperforming assets at December 31,
1993 of $73,366,000, or 1.44% of total loans and leases and OREO and 1.01% of
total assets. The decrease in nonperforming assets of $10,254,000, or 14.0%,
was primarily attributable to: (1) the sale of a $10.0 million commercial
property classified as OREO (previously transferred in 1993 from real estate
construction to OREO as a result of foreclosures); (2) $5.0 million in loan
repayments; (3) a $9.1 million real estate construction loan which was returned
to accrual status; and (4) charge-offs on two commercial loans and one real
estate construction loan totalling $11.0 million. The decrease was offset by
the addition to nonaccrual status of three commercial loans totalling $7.3
million, seven residential real estate loans totalling $2.3 million and five
commercial real estate loans totalling $22.2 million.
All of the loans which are past due 90 days or more and still accruing
interest are in management's judgement adequately collateralized and in the
process of collection.
In recent years, the level of the Company's nonperforming assets and
charge-offs has been adversely affected by the unusually long recession
experienced by the Hawaii economy and weaknesses in the local and California
real estate markets. The Company believes that the Hawaii economy is beginning
to show signs of improvement, and local real estate markets evidence signs of
having stabilized. A significant and sustained improvement in the Hawaii
economy and in local real estate markets should have a positive effect on the
Company's overall asset quality; however, there can be no assurance that such
improvement will result in a significant reduction in the level of
nonperforming assets (which consist primarily of commercial real estate loans)
or related charge-offs in the near term.
The following table presents information related to loans and leases on a
nonaccrual basis for the year ended December 31, 1994:
- -------------------------------------------------------------
(in thousands) Domestic Foreign Total
- -------------------------------------------------------------
Interest income which
would have been recorded
if loans and leases had
been current $6,661 $ -- $6,661
=============================================================
Interest income recorded
during this year $1,755 $ -- $1,755
=============================================================
DEPOSITS
Deposits are the largest component of the Company's liabilities and account for
the greatest portion of total interest expense. At December 31, 1994, total
deposits were $5,152,213,000, a decrease of $67,915,000, or 1.3%, from December
31, 1993. The decrease was primarily attributable to the continuing shifting of
public deposits as previously described and customers seeking higher-yielding
alternative investments.
For 1994, average deposits increased $13,104,000, or .3%, as compared to
1993. Exclusive of the average deposits of Pioneer for the year ended December
31, 1994, average deposits decreased $213,559,000, or 4.4%.
For 1993, average deposits decreased $14,754,000, or .3%, as compared to
1992. Exclusive of the average deposits of Pioneer for the year ended December
31, 1993, average deposits decreased $177,541,000, or 3.5%. The investment by
customers in higher-yielding alternative investments, generally with
nonfinancial institutions, and the shift of public deposits contributed to the
decrease in average deposits during the last two years.
The following table presents the average amount and average rate paid on
deposits for the years indicated:
- ----------------------------------------------------------------------
1994 1993 1992
- ----------------------------------------------------------------------
(dollars in millions) AMOUNT RATE Amount Rate Amount Rate
- ----------------------------------------------------------------------
Domestic:
Noninterest-
bearing
demand $ 876 --% $ 925 --% $ 869 --%
Interest-bearing
demand 1,127 2.15 1,213 2.15 1,183 2.95
Savings 1,231 2.08 1,396 2.04 1,286 4.24
Time 1,641 3.82 1,407 4.16 1,585 5.02
Foreign 207 3.75 128 2.98 161 4.23
- ---------------------------- ------ ------
TOTAL $5,082 $5,069 $5,084
======================================================================
The following table presents the maturity distribution of domestic time
certificates of deposits of $100,000 or more at December 31 for the years
indicated:
- ------------------------------------------------------------
(in millions) 1994 1993 1992
- ------------------------------------------------------------
3 months or less $236 $231 $271
Over 3 months through 6 months 104 66 111
Over 6 months through 12 months 189 97 76
Over 12 months 83 129 100
- ------------------------------------------------------------
TOTAL $612 $523 $558
============================================================
28
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF First Hawaiian, Inc. and Subsidiaries
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
- --------------------------------------------------------------------------------
LIQUIDITY MANAGEMENT
Liquidity refers to the Company's ability to provide sufficient cash flows to
fund operations and to meet obligations and commitments on a timely basis at
reasonable costs. The Company achieves its liquidity objectives from both
assets and liabilities.
Asset-based liquidity is derived from its investment securities portfolio
and short-term investments which can be readily converted to cash. These liquid
assets consist of cash and due from banks, interest-bearing deposits, Federal
funds sold, securities purchased under agreements to resell and investment
securities. The aggregate of these assets represented 21.4% of total assets at
the end of 1994 compared to 25.0% at the end of 1993. Additional information on
off-balance sheet items is presented in Note 16 to the Financial Statements.
Liability-based liquidity is provided primarily from deposits. Average
total deposits for 1994 increased $13,104,000, or .3%, to $5,082,230,000.
Average total deposits had a five-year annual compound growth rate of 5.1%.
Average total deposits for 1994 and 1993 funded 70.6% and 75.0%, respectively,
of average total assets. Demand, savings and domestic time deposits under
$100,000 -- which the Company considers its core deposits because of their
historical stability and relatively low cost -- constituted 82.9% of total
deposits at December 31, 1994 and 82.7% at December 31, 1993.
Additional liquidity was provided from short-term borrowings, which
consisted of commercial paper issued by the Company, Federal funds purchased
and securities sold under agreements to repurchase, lines of credit from other
banks and credit facilities from the FHLB. Additional information on short-term
borrowings is provided in Note 7 to the Financial Statements. Also, the Company
has access to offshore deposits in the international market which provides
another available source of funds.
The Company's commercial paper is assigned a rating of A2 by Standard &
Poor's ("S&P"). The Company's long-term debt is assigned a rating of Baa-1 by
Moody's and BBB+ by S&P. The Company currently has a BankWatch rating of B.
As indicated in the Consolidated Statements of Cash Flows, net cash
provided by operating and financing activities was $269,736,000 and net cash
used in investing activities was $435,989,000 for 1994. For 1993, net cash
provided by operating and financing activities was $197,721,000 and net cash
used in investing activities was $87,251,000. For 1992, net cash provided by
operating activities was $135,647,000 and net cash used in investing and
financing activities was $163,974,000.
The Company's ability to pay dividends depends primarily upon dividends and
other payments from its subsidiaries, which are subject to certain limitations
as described in Note 10 to the Financial Statements.
ASSET/LIABILITY MANAGEMENT
The Company actively measures and manages its exposure to interest rate risk in
order to maintain relatively stable net interest margins and to allow it to
take advantage of profitable business opportunities.
Interest rate risk refers to the exposure to earnings and capital arising
from changes in future interest rates. The Company carefully measures and
monitors its interest rate risk exposure using gap analysis, market value of
equity analysis, and net interest income computer simulations. The net interest
income simulations are usually done on a quarterly basis, or more frequently if
there have been major changes to the balance sheet. These simulations look at
how the Company's net interest income is affected from flat, rising, or
declining rates using the current balance sheet and simulating net interest
income going forward two years. Under these simulations, at December 31, 1994,
the Company's exposure to changes in interest rates was well within current
guidelines which allow for no more than a 10% adverse change in net interest
income for a 1% change in rates over one year.
Interest rate risk exposure is managed through the use of off-balance
sheet instruments such as swaps or floors and through extending or shortening
the duration of the investment securities portfolio.
29
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF First Hawaiian, Inc. and Subsidiaries
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
- --------------------------------------------------------------------------------
INTEREST RATE SENSITIVITY
The Company's interest rate sensitivity position as of December 31, 1994, is
presented below. The interest rate sensitivity gap, shown at the bottom of the
table, refers to the difference between assets and liabilities subject to
repricing, maturity, runoff and/or volatility during a specified period. The
gap is adjusted for interest rate swaps which are hedging certain assets or
liabilities on the balance sheet. (For ease of analysis, all of the off-balance
sheet adjustments are consolidated into one line on the gap table.)
Since all interest rates and yields do not adjust at the same velocity or
magnitude, and since volatility is subject to change, the gap is only a general
indicator of interest rate sensitivity. At December 31, 1994, the cumulative
one-year gap for the Company was a negative $17.4 million, representing .23% of
total assets. This remains well within the Company's current guidelines of
+/-10% of total assets for the cumulative one-year gap. Because of the current
asset and liability mix, a change in interest rates is not expected to have a
material impact on the net interest margin or liquidity of the Company.
- --------------------------------------------------------------------------------------------------------------------
(dollars in thousands) 0-3 Months 4-12 Months 1-5 Years Over 5 Years Total
- --------------------------------------------------------------------------------------------------------------------
Assets:
Interest-bearing deposits in other banks $ 11,670 $ -- $ -- $ -- $ 11,670
Federal funds sold and securities purchased
under agreements to resell 180,000 -- -- -- 180,000
Investment securities 377,368 443,478 310,113 16,920 1,147,879
Net loans and leases:
Commercial, financial and agricultural 1,000,725 166,391 111,653 28,376 1,307,145
Real estate -- construction 264,951 31,714 24,118 -- 320,783
Foreign 79,452 85,191 54,168 17,153 235,964
Other 1,235,867 1,312,505 702,413 418,888 3,669,673
- --------------------------------------------------------------------------------------------------------------------
Total earning assets 3,150,033 2,039,279 1,202,465 481,337 6,873,114
Noninterest-earning assets 176,000 -- -- 486,030 662,030
- --------------------------------------------------------------------------------------------------------------------
Total assets $ 3,326,033 $ 2,039,279 $1,202,465 $ 967,367 $7,535,144
====================================================================================================================
Liabilities and stockholders' equity:
Interest-bearing deposits $ 3,306,409 $ 687,412 $ 263,515 $ 33,008 $4,290,344
Noninterest-bearing deposits 60,903 -- -- 800,966 861,869
Short-term borrowings 940,684 378,598 10,534 -- 1,329,816
Long-term debt 50,500 6,500 60,553 101,778 219,331
Stockholders' equity -- -- -- 627,944 627,944
Off-balance sheet adjustment (69,174) (34,105) 25,887 77,392 --
Noninterest-bearing liabilities 54,963 -- -- 150,877 205,840
- --------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $ 4,344,285 $ 1,038,405 $ 360,489 $ 1,791,965 $7,535,144
====================================================================================================================
Interest sensitivity gap $(1,018,252) $ 1,000,874 $ 841,976 $ (824,598)
Cumulative gap $(1,018,252) $ (17,378) $ 824,598 $ --
Cumulative gap as a percent of total assets (13.51)% (.23)% 10.94% --%
====================================================================================================================
30
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF First Hawaiian, Inc. and Subsidiaries
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
- --------------------------------------------------------------------------------
LEASE COMMITMENT
In December, 1993, the Company entered into a noncancelable agreement to lease
a certain office building that is currently under construction on the site of
its former downtown headquarters block, which it owns in fee simple.
Concurrently, the Company entered into a ground lease of the land to the lessor
of the building. Rent obligation for the building will commence on December 1,
1996 and will expire on December 1, 2003. The lease agreement is not
anticipated to have an adverse impact on the results of operations in the
future. Additional information on the lease agreement is provided in Note 15 to
the Financial Statements.
CAPITAL REQUIREMENTS
Bank holding companies are required to comply with risk-based capital
guidelines as established by the Federal Reserve Board. The guidelines define
qualifying capital (Tier 1 Capital and Total Capital) and risk-weighted assets.
Tier 1 Capital includes stockholders' equity less unrealized valuation
adjustment and goodwill and, beginning in 1993, all other intangibles, subject
to certain exceptions described below.
Total Capital includes, in addition to Tier 1 Capital, subordinated and
other qualifying term debt and a portion of the allowance for loan and lease
losses. The Tier 1 component must comprise at least 50% of qualifying Total
Capital. Risk-based capital ratios are calculated with reference to
risk-weighted assets which include both on- and off-balance sheet exposures. A
company's risk-based capital ratio is calculated by dividing its qualifying
capital (the numerator of the ratio) by its risk-weighted assets (the
denominator). The minimum required qualifying Total Capital ratio is 8%, of
which at least 4% must consist of Tier 1 Capital.
In addition, bank holding companies are required to maintain a minimum
leverage ratio of Tier 1 Capital to average quarterly total assets (net of
goodwill and other intangibles, subject to certain exceptions). The Federal
Reserve Board has stated that the minimum leverage ratio is 3% for the most
highly rated banking organizations which are not experiencing or anticipating
significant growth. Other banking organizations are expected to maintain
leverage ratios of at least one to two percent higher.
The following tables present the Company's regulatory capital position at
December 31, 1994:
RISK-BASED CAPITAL RATIOS
- ------------------------------------------------------------------
(dollars in thousands) AMOUNT RATIO
- ------------------------------------------------------------------
Tier 1 Capital $ 546,256 9.31%
Tier 1 Capital minimum requirement 234,651 4.00
- ------------------------------------------------------------------
EXCESS $ 311,605 5.31%
==================================================================
Total Capital $ 707,506 12.06%
Total Capital minimum requirement 469,302 8.00
- ------------------------------------------------------------------
EXCESS $ 238,204 4.06%
==================================================================
RISK-WEIGHTED ASSETS $5,866,257
=========================================================
LEVERAGE RATIO
- ------------------------------------------------------------------
(dollars in thousands) AMOUNT RATIO
- ------------------------------------------------------------------
Tier 1 Capital to average quarterly
total assets (net of certain intangibles)
(Tier 1 Leverage Ratio) $ 546,256 7.51%
Minimum leverage requirement 218,144 3.00
- ------------------------------------------------------------------
EXCESS $ 328,112 4.51%
==================================================================
AVERAGE QUARTERLY TOTAL ASSETS
(NET OF CERTAIN INTANGIBLES) $7,271,468
=========================================================
31
21
SUMMARY OF QUARTERLY FINANCIAL DATA First Hawaiian, Inc. and Subsidiaries
(UNAUDITED)
- --------------------------------------------------------------------------------
FOURTH QUARTER RESULTS
Earnings for the fourth quarter of 1994 were $14,997,000, a decrease of
$4,381,000, or 22.6%, from the $19,378,000 earned during the same quarter in
1993. Earnings per share for the fourth quarter of 1994 were down 21.7% to
$.47, compared to the $.60 for the year-earlier period. The decrease was due
primarily to a nonrecurring charge of $5,000,000 to cover estimated losses
attributable to investments made in the trust area that were outside of the
clients' express investment guidelines and a higher provision for loan and
lease losses of $6,000,000, primarily attributable to the write-off of a
commercial loan of $5,440,000 previously mentioned. These two charges reduced
fourth quarter net income by approximately $6.3 million, or $.19 per share.
A summary of unaudited quarterly financial data for 1994 and 1993 is presented
below:
- ----------------------------------------------------------------------------------------------------
Quarter
----------------------------------------------- Annual
(in thousands, except per share data) First Second Third Fourth Total
- ----------------------------------------------------------------------------------------------------
1994
INTEREST INCOME $110,044 $114,560 $120,925 $130,231 $475,760
INTEREST EXPENSE 38,961 41,560 44,649 54,518 179,688
- ----------------------------------------------------------------------------------------------------
NET INTEREST INCOME 71,083 73,000 76,276 75,713 296,072
PROVISION FOR LOAN AND LEASE LOSSES 3,843 3,288 6,548 9,243 22,922
OTHER OPERATING INCOME 23,069 21,099 21,105 21,399 86,672
OTHER OPERATING EXPENSES 61,404 61,578 60,489 64,850 248,321
- ----------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 28,905 29,233 30,344 23,019 111,501
INCOME TAXES 10,168 10,233 10,567 8,022 38,990
- ----------------------------------------------------------------------------------------------------
NET INCOME $ 18,737 $ 19,000 $ 19,777 $ 14,997 $ 72,511
====================================================================================================
NET INCOME PER SHARE $.58 $.59 $.61 $.47 $2.25
====================================================================================================
1993
Interest income $105,746 $104,869 $107,970 $110,346 $428,931
Interest expense 38,547 35,538 37,417 39,207 150,709
- ----------------------------------------------------------------------------------------------------
Net interest income 67,199 69,331 70,553 71,139 278,222
Provision for loan and lease losses 3,903 2,903 3,213 3,243 13,262
Other operating income 17,992 20,003 20,837 20,755 79,587
Other operating expenses 55,586 53,714 57,029 59,113 225,442
- ----------------------------------------------------------------------------------------------------
Income before income taxes and
cumulative effect of a change
in accounting principle 25,702 32,717 31,148 29,538 119,105
Income taxes 7,706 10,614 12,418 10,160 40,898
Cumulative effect of a change in
accounting principle 3,650 -- -- -- 3,650
- ----------------------------------------------------------------------------------------------------
Net income $ 21,646 $ 22,103 $ 18,730 $ 19,378 $ 81,857
====================================================================================================
Per share:
Income before cumulative
effect of a change in
accounting principle $.56 $.68 $.57 $.60 $2.41
Net income $.67 $.68 $.57 $.60 $2.52
====================================================================================================
32
22
SUPPLEMENTARY DATA First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
INVESTMENT SECURITIES BY MATURITIES AND WEIGHTED AVERAGE YIELDS
The following table presents the maturities of held-to-maturity investment
securities, excluding securities which have no stated maturity at December 31,
1994, and the weighted average yields (for obligations exempt from Federal
income taxes on a taxable equivalent basis assuming a 35% tax rate) of such
securities. The tax equivalent adjustment is made for items exempt from Federal
income taxes to make them comparable with taxable items before any income taxes
are applied.
MATURITY
---------------------------------------------------------------------------
AFTER ONE AFTER FIVE
WITHIN BUT WITHIN BUT WITHIN AFTER
ONE YEAR FIVE YEARS TEN YEARS TEN YEARS TOTAL
--------------- --------------- --------------- --------------- ---------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
- --------------------------------------------------------------------------------------------------------------------------------
(dollars in millions)
U.S. Treasury and other U.S.
Government agencies
and corporations $ 404 4.21% $ 177 4.60% $ 36 4.73% $ 124 5.21% $ 741 4.43%
States and political
subdivisions 93 8.21 60 7.56 1 5.96 1 5.67 155 7.93
Other -- -- 18 6.63 -- -- 29 7.06 47 6.89
- --------------------------------------- ----- ---- ----- -----
Total $ 497 4.97% $ 255 5.44% $ 37 4.76% $ 154 5.21% $ 943 5.13%
================================================================================================================================
Note:
The weighted average yields were calculated on the basis of the cost and
effective yields weighted for the scheduled maturity of each security.
The following table presents the maturities of available-for-sale investment
securities, excluding securities which have no stated maturity at December 31,
1994, and the weighted average yields (for obligations exempt from Federal
income taxes on a taxable equivalent basis assuming a 35% tax rate) of such
securities. The tax equivalent adjustment is made for items exempt from Federal
income taxes to make them comparable with taxable items before any income taxes
are applied.
MATURITY
---------------------------------------------------------------------------
AFTER ONE AFTER FIVE
WITHIN BUT WITHIN BUT WITHIN AFTER
ONE YEAR FIVE YEARS TEN YEARS TEN YEARS TOTAL
--------------- --------------- --------------- --------------- ---------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
- --------------------------------------------------------------------------------------------------------------------------------
(dollars in millions)
U.S. Treasury and other U.S.
Government agencies
and corporations $ -- --% $50 6.23% $ -- --% $26 6.66% $ 76 6.37%
States and political
subdivisions -- -- -- -- -- -- 12 7.15 12 7.15
Other -- -- 15 5.24 -- -- 51 5.23 66 5.23
- --------------------------------------- --- ----- --- ----
Total $ -- --% $65 6.00% $ -- --% $89 5.90% $154 5.94%
================================================================================================================================
Note:
The weighted average yields were calculated on the basis of the cost and
effective yields weighted for the scheduled maturity of each security.
33
23
REPORT OF INDEPENDENT ACCOUNTANTS First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
TO THE STOCKHOLDERS
FIRST HAWAIIAN, INC.
We have audited the accompanying consolidated balance sheets of First Hawaiian,
Inc. and Subsidiaries as of December 31, 1994 and 1993, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1994. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of First
Hawaiian, Inc. and Subsidiaries as of December 31, 1994 and 1993, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1994 in conformity with generally
accepted accounting principles.
As discussed in Notes 2 and 13 to the financial statements, the Company
changed its method of accounting for certain investments in debt and equity
securities and income taxes, respectively, in 1993.
[SIGNATURE: COOPERS & LYBRAND L.L.P.]
Honolulu, Hawaii
January 18, 1995
34
24
CONSOLIDATED BALANCE SHEETS First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
December 31,
--------------------------
(in thousands, except number of shares and per share data) 1994 1993
- ---------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 269,876 $ 436,129
Interest-bearing deposits in other banks 11,670 116,736
Federal funds sold and securities purchased under agreements to resell 180,000 35,000
Investment securities:
Held-to-maturity (fair value of $981,651 in 1994 and
$1,144,327 in 1993) (note 2) 995,887 1,132,025
Available-for-sale (note 2) 151,992 98,453
Loans and leases:
Loans and leases (note 3) 5,533,565 5,066,809
Less allowance for loan and lease losses (note 4) 61,250 62,253
- ---------------------------------------------------------------------------------------------------------
Net loans and leases 5,472,315 5,004,556
- ---------------------------------------------------------------------------------------------------------
Premises and equipment (note 5) 238,356 233,487
Customers' acceptance liability 732 854
Core deposit premium (net of accumulated amortization of
$4,203 in 1994 and $3,026 in 1993) (note 1) 13,722 15,380
Goodwill (net of accumulated amortization of
$9,866 in 1994 and $6,348 in 1993) (note 1) 78,896 81,231
Other assets 121,698 115,280
- ---------------------------------------------------------------------------------------------------------
TOTAL ASSETS $7,535,144 $7,269,131
=========================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand $ 861,869 $ 974,478
Interest-bearing demand 1,160,219 1,143,037
Savings 1,226,877 1,507,200
Time (fair value of $1,508,630 in 1994 and $1,352,925 in 1993) (note 6) 1,503,347 1,343,841
Foreign (fair value of $400,900 in 1994 and $252,715 in 1993) (note 6) 399,901 251,572
- ---------------------------------------------------------------------------------------------------------
Total deposits 5,152,213 5,220,128
- ---------------------------------------------------------------------------------------------------------
Short-term borrowings (note 7) 1,329,816 1,069,682
Acceptances outstanding 732 854
Other Liabilities 205,108 148,331
Long-term debt (note 8) 219,331 221,767
- ---------------------------------------------------------------------------------------------------------
Total liabilities 6,907,200 6,660,762
- ---------------------------------------------------------------------------------------------------------
Commitments and contingent liabilities (notes 11, 15 and 16)
Stockholders' equity:
Common stock $5 par value (notes 9 and 11)
Authorized--100,000,000 shares
Issued--32,542,797 shares in 1994 and 1993 162,713 162,713
Surplus 133,820 133,820
Retained earnings (note 10) 346,339 311,836
Unrealized valuation adjustment (1,033) --
Treasury stock--516,623 shares in 1994 (13,895) --
- ---------------------------------------------------------------------------------------------------------
Total stockholders' equity 627,944 608,369
- ---------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $7,535,144 $7,269,131
=========================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
35
25
CONSOLIDATED STATEMENTS OF INCOME First Hawaiian, Inc. and Subsidiaries
- -------------------------------------------------------------------------------------------------
Year Ended December 31,
--------------------------------
(in thousands, except number of shares and per share data) 1994 1993 1992
- -------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans $407,531 $355,961 $372,489
Lease financing income 10,844 12,722 14,259
Interest on investment securities:
Taxable interest income 45,248 44,667 64,542
Exempt from Federal income taxes 4,332 3,185 5,695
Other interest income 7,805 12,396 18,589
- -------------------------------------------------------------------------------------------------
Total interest income 475,760 428,931 475,574
- -------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits (note 6) 120,289 116,887 175,815
Short-term borrowings 47,813 26,477 26,622
Long-term debt 11,586 7,345 4,346
- -------------------------------------------------------------------------------------------------
Total interest expense 179,688 150,709 206,783
- -------------------------------------------------------------------------------------------------
Net interest income 296,072 278,222 268,791
Provision for loan and lease losses (note 4) 22,922 13,262 12,812
- -------------------------------------------------------------------------------------------------
Net interest income after provision for loan and lease losses 273,150 264,960 255,979
- -------------------------------------------------------------------------------------------------
OTHER OPERATING INCOME
Trust income 22,847 21,401 18,171
Service charges on deposit accounts 24,014 21,791 18,323
Other service charges and fees 31,937 27,660 26,358
Securities gains, net (note 2) 178 1,955 161
Other 7,696 6,780 6,584
- -------------------------------------------------------------------------------------------------
Total other operating income 86,672 79,587 69,597
- -------------------------------------------------------------------------------------------------
OTHER OPERATING EXPENSES
Salaries and wages 92,237 86,011 80,320
Employee benefits (note 11) 26,484 24,783 21,954
Occupancy expense (notes 5 and 15) 23,280 20,416 17,021
Equipment expense (notes 5 and 15) 24,812 20,243 18,522
Other (note 12) 81,508 73,989 59,879
- -------------------------------------------------------------------------------------------------
Total other operating expenses 248,321 225,442 197,696
- -------------------------------------------------------------------------------------------------
Income before income taxes and cumulative effect
of a change in accounting principle 111,501 119,105 127,880
- -------------------------------------------------------------------------------------------------
INCOME TAXES (note 13)
Provision before effect of change in tax rate 38,990 38,976 40,980
Adjustment to deferred tax liability and
current tax provision for change in tax rate -- 1,922 --
- -------------------------------------------------------------------------------------------------
Total income taxes 38,990 40,898 40,980
- -------------------------------------------------------------------------------------------------
Income before cumulative effect of a
change in accounting principle 72,511 78,207 86,900
Cumulative effect of a change in accounting principle (note 13) -- 3,650 --
- -------------------------------------------------------------------------------------------------
NET INCOME $ 72,511 $ 81,857 $ 86,900
=================================================================================================
PER SHARE DATA
Income before cumulative effect of a
change in accounting principle $2.25 $2.41 $2.70
Cumulative effect of a change in accounting principle -- .11 --
- -------------------------------------------------------------------------------------------------
NET INCOME $2.25 $2.52 $2.70
=================================================================================================
CASH DIVIDENDS $1.18 $1.135 $1.06
=================================================================================================
AVERAGE SHARES OUTSTANDING 32,259,321 32,505,109 32,225,339
=================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
36
26
CONSOLIDATED STATEMENTS OF CHANGES First Hawaiian, Inc. and Subsidiaries
IN STOCKHOLDERS' EQUITY and First Hawaiian, Inc. (Parent Company)
- -------------------------------------------------------------------------------------------------------------------------
Common Stock Unrealized
(in thousands, except number of shares ----------------------- Retained Valuation Treasury
and per share data) Shares Amount Surplus Earnings Adjustment Stock
- -------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1991 32,078,534 $160,392 $123,849 $214,061 $ -- $ --
Net income--1992 -- -- -- 86,900 -- --
Incentive Plan for Key Executives
(note 11) -- -- 155 -- -- --
Cash dividends ($1.06 per share)
(note 10) -- -- -- (34,161) -- --
Issuance of common stock (note 9) 423,077 2,115 8,885 -- -- --
- -------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1992 32,501,611 162,507 132,889 266,800 -- --
Net income--1993 -- -- -- 81,857 -- --
Incentive Plan for Key Executives
(note 11) -- -- 137 -- -- --
Cash dividends ($1.135 per share)
(note 10) -- -- -- (36,821) -- --
Issuance of common stock (note 9) 41,186 206 794 -- -- --
- -------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1993 32,542,797 162,713 133,820 311,836 -- --
Net income--1994 -- -- -- 72,511 -- --
Purchase of treasury stock -- -- -- -- -- (13,895)
Cash dividends ($1.18 per share)
(note 10) -- -- -- (38,008) -- --
Unrealized valuation adjustment
(note 2) -- -- -- -- (1,033) --
- -------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1994 32,542,797 $162,713 $133,820 $346,339 $(1,033) $(13,895)
=========================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
37
27
CONSOLIDATED STATEMENTS OF CASH FLOWS First Hawaiian, Inc. and Subsidiaries
- ----------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------------
(in thousands) 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------
CASH AND DUE FROM BANKS AT BEGINNING OF YEAR $ 436,129 $ 325,659 $ 353,986
- ----------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income 72,511 81,857 86,900
Provision for loan and lease losses 22,922 13,262 12,812
Depreciation and amortization 24,766 20,765 19,157
Income taxes 6,826 (5,415) 21,682
Adjustment to deferred tax liability and
current tax provision for change in tax rate -- 1,922 --
Cumulative effect of a change in accounting principle -- (3,650) --
Decrease (increase) in interest receivable (7,646) 170 9,043
Increase (decrease) in interest payable 7,956 1,424 (10,083)
Decrease (increase) in prepaid expenses 2,184 (1,031) (3,864)
Write-off of building costs -- 5,444 --
Other -- 20,136 --
- ----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 129,519 134,884 135,647
- ----------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Net decrease in interest-bearing deposits in other banks 105,066 39,580 35,716
Net decrease (increase) in Federal funds sold and
securities purchased under agreements to resell (145,000) 370,000 (235,136)
Purchase of held-to-maturity investment securities (240,706) (940,385) (704,746)
Proceeds from sale of held-to-maturity investment securities 248,758 322,315 402,201
Proceeds from maturity of held-to-maturity investment
securities 128,086 498,858 576,855
Purchase of available-for-sale investment securities (115,032) (263,828) --
Proceeds from sale of available-for-sale investment securities 15,195 137,709 --
Proceeds from maturity of available-for-sale investment
securities 45,265 27,666 --
Net increase in loans and leases to customers (493,871) (166,146) (80,107)
Capital expenditures (29,652) (60,067) (65,484)
Purchase of Pioneer Fed BanCorp, Inc.,
net of cash acquired of $18,157 -- (68,950) --
Other 45,902 15,997 (29,661)
- ----------------------------------------------------------------------------------------------------------
Net cash used in investing activities (435,989) (87,251) (100,362)
- ----------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net decrease in deposits (67,915) (293,973) (248,534)
Net increase in short-term borrowings 237,134 309,631 209,743
Proceeds from long-term debt 21,500 108,000 10,000
Payments on long-term debt (936) (21,525) (508)
Cash dividends paid (38,008) (36,821) (34,161)
Purchase of common stock for issuance under
Incentive Plan for Key Executives and Stock Incentive Plan (11,558) (2,475) (152)
- ----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 140,217 62,837 (63,612)
- ----------------------------------------------------------------------------------------------------------
CASH AND DUE FROM BANKS AT END OF YEAR $ 269,876 $ 436,129 $ 325,659
==========================================================================================================
Supplemental disclosures:
Interest paid $ 171,732 $ 160,551 $ 227,776
Net income taxes paid $ 24,311 $ 40,945 $ 19,298
==========================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
38
28
NOTES TO FINANCIAL STATEMENTS First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of First Hawaiian, Inc. and Subsidiaries
(the "Company") conform with generally accepted accounting principles and
practices within the banking industry. The following is a summary of the
significant accounting policies:
RECLASSIFICATIONS
Certain reclassifications were made to the 1993 and 1992 Consolidated
Statements of Income to conform to the 1994 presentation. Such
reclassifications did not have a material effect on the Consolidated Statements
of Income.
CONSOLIDATION
The consolidated financial statements of the Company include the accounts of
First Hawaiian, Inc. (the "Parent") and its wholly-owned subsidiary
companies -- First Hawaiian Bank and its wholly-owned subsidiaries (the "Bank");
Pioneer Federal Savings Bank ("Pioneer") and its wholly-owned subsidiary; First
Hawaiian Creditcorp, Inc. ("Creditcorp"); First Hawaiian Leasing, Inc.
("Leasing"); and FHI International, Inc. All significant intercompany balances
and transactions have been eliminated in consolidation.
INVESTMENT SECURITIES
Investment securities consist principally of debt instruments issued by the
U.S. Treasury and other U.S. Government agencies and corporations, state and
local government units and asset-backed securities.
Investments in and obligations to individual counterparties are presented
as net amounts in the consolidated financial statements of the Company only if
the conditions specified in Financial Accounting Standards Board ("FASB")
Interpretation No. 39, "Offsetting of Amounts Related to Certain Contracts,"
are met. No such netting occurred as of December 31, 1994.
As of December 31, 1993, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." In accordance with SFAS No. 115, investment
securities are classified in three categories and accounted for as follows: (1)
held-to-maturity securities are debt securities, which the Company has the
positive intent and ability to hold to maturity, and are reported at amortized
cost; (2) trading securities are debt securities that are bought and held
principally for the purpose of selling them in the near term and are reported
at fair value, with unrealized gains and losses included in current earnings;
and (3) available-for-sale securities are debt securities not classified as
either held-to-maturity securities or trading securities and are reported at
fair value, with unrealized gains and losses excluded from current earnings and
reported in a separate component of stockholders' equity.
Certain securities which could be liquidated prior to their respective
maturities under certain circumstances have been classified as
available-for-sale. Unrealized gains or losses are reflected as changes to the
capital account.
Prior to December 31, 1993, because the Company had both the ability and
the intent to hold the investment securities to maturity, they were carried at
cost, adjusted for amortization of premiums and accretion of discounts.
Gains and losses realized on the sales of investment securities are
determined using the specific identification method.
LOANS AND LEASE FINANCING
Loans are stated at their principal outstanding amounts, net of any unearned
discounts. Interest income on loans is accrued and recognized on the principal
amount outstanding.
Loan origination fees and substantially all loan commitment fees are
deferred and accounted for as an adjustment of the yield.
Lease financing transactions consist of two types:
(1) Equipment without outside financing is accounted for using the
direct financing method with income recognized over the life of the lease based
upon a constant periodic rate of return on the net investment in the lease.
(2) Leveraged lease transactions are subject to outside financing through
one or more participants, without recourse to the Company. These transactions
are accounted for by recording as the net investment in each lease the
aggregate of rentals receivable (net of principal and interest on the related
nonrecourse debt) and estimated residual value of the equipment less the
unearned income. Income from these lease transactions is recognized during the
periods in which the net investment is positive.
Loans and leases are placed on nonaccrual status when serious doubt exists
as to the collectibility of the principal and/or interest. When loans are
placed on nonaccrual status, any accrued and unpaid interest is reversed
against interest income of the current period. Interest payments received on
nonaccrual loans and leases are applied as a reduction of the principal when
concern exists as to the ultimate collection of the principal; otherwise, such
payments are recorded as income. Loans and leases are removed from nonaccrual
status when they become current as to both principal and interest and when
concern no longer exists as to the collectibility of principal and interest.
39
29
NOTES TO FINANCIAL STATEMENTS (Continued) First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
ALLOWANCE FOR LOAN AND LEASE LOSSES
The allowance for loan and lease losses (the "Allowance") is maintained at a
level which, in management's judgment, is adequate to absorb future losses.
Estimates of future loan and lease losses involve judgment and assumptions as
to various factors which, in management's judgment, deserve current recognition
in estimating such losses and in determining the adequacy of the Allowance.
Principal factors considered by management include the historical loss
experience, the value and adequacy of collateral, the level of nonperforming
(nonaccrual and renegotiated) loans and leases, loan concentrations, the growth
and composition of the portfolio, the review of monthly delinquency reports,
the results of examinations of individual loans and leases and/or evaluation of
the overall portfolio by senior credit personnel, internal auditors, and
Federal and State regulatory agencies and general economic conditions.
The Allowance is reduced by loans and leases charged off when
collectibility becomes doubtful and the underlying collateral, if any, is
considered inadequate to liquidate the outstanding debt. Recoveries on loans
and leases previously charged off are added to the Allowance.
OTHER REAL ESTATE OWNED
Other real estate owned, included in other assets, is comprised of properties
acquired primarily through foreclosure proceedings. When acquired, these
properties are valued at fair value which establishes the new cost basis of
other real estate owned. Losses arising at the time of acquisition of such
properties are charged against the Allowance. Subsequent to acquisition, such
properties are carried at the lower of cost or fair value less estimated
selling costs. Write-downs of such properties subsequent to the date of
acquisition are included in other operating expenses.
PREMISES AND EQUIPMENT
Premises and equipment, including leasehold improvements, are stated at cost
less accumulated depreciation and amortization. Depreciation and amortization
are computed on a straight-line basis over the estimated useful lives of 10-40
years for premises, 3-13 years for equipment and the lease term for leasehold
improvements.
CORE DEPOSIT PREMIUM AND GOODWILL
The core deposit premium is being amortized on the straight-line method over
various lives ranging from 9 to 20 years. The excess of the purchase price over
the fair value of the net assets acquired is accounted for as goodwill and is
being amortized on the straight-line method over 25 years.
INCOME TAXES
Effective January 1, 1993, the Company adopted SFAS No. 109, "Accounting for
Income Taxes," which requires recognition of deferred income tax liabilities
and assets for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this method,
deferred income tax liabilities and assets are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
Prior to January 1, 1993, the provision for income taxes was based on
taxable income and expenses reported in the Consolidated Statements of Income,
in accordance with Accounting Principles Board Opinion No. 11, rather than
amounts currently payable under tax laws.
Excise tax credits relating to premises and equipment are accounted for
under the flow-through method which recognizes the benefit in the year the
asset is placed in service. The investment and excise tax credits related to
lease equipment, except for investment and excise tax credits that are passed
on to lessees, are recognized during the periods in which the net investment is
positive.
A consolidated Federal income tax return is filed for the Company. Amounts
equal to income tax benefits of those companies having taxable losses or
credits are reimbursed by other companies which would have incurred current
income tax liabilities.
INTEREST RATE SWAPS AND FLOORS
The Company engages in interest rate swap and floor activities in managing its
interest rate risk. Premiums for purchased floors are amortized over the life
of the contracts. Since the contracts represent an exchange of interest
payments and the underlying principal balances are not affected, there is no
effect on the total assets or liabilities of the Company. The income or expense
from these contracts is included as part of the interest income or expense for
the corresponding asset or liability being hedged.
PER SHARE DATA
Net income per share is computed by dividing net income by the average number
of shares outstanding during the year.
The impact of common stock equivalents, such as stock options, is not
material; therefore, they are not included in the computation.
40
30
NOTES TO FINANCIAL STATEMENTS (Continued) First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating
the fair value of financial instruments:
Cash and due from banks: The carrying amounts reported in the
Consolidated Balance Sheets of cash and short-term instruments approximate
fair values.
Investment securities (including mortgage-backed securities): Fair
values of investment securities are based on quoted market prices, where
available. If quoted market prices are not available, fair values are based
on quoted market prices of comparable instruments.
Loans and leases: For variable-rate loans that reprice frequently and
with no significant change in credit risk, fair values are based on
carrying values. The fair values for certain mortgage loans (e.g., one-to-
four family residential), credit card loans, and other consumer loans are
based on quoted market prices of similar loans sold in conjunction with
securitization transactions, adjusted for differences in loan
characteristics. The fair values of other loans (e.g., commercial real
estate and rental property mortgage loans, commercial and industrial loans,
financial institution loans, and agricultural loans) are estimated using
discounted cash flow analyses, which utilize interest rates currently being
offered for loans with similar terms to borrowers of similar credit
quality. The carrying amount of accrued interest approximates its fair
value.
Off-balance sheet commitments and contingent liabilities: Fair values
of off-balance sheet commitments and contingent liabilities are based upon
quoted market prices of comparable instruments (interest rate floors); fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the counterparties' credit standing
(letters of credit and commitments to extend credit); or, pricing models
based upon brokers' quoted markets, current levels of interest rates, and
specific cash flow schedules (interest rate swaps).
Deposits: The fair values of demand deposits (e.g., interest and
noninterest checking, passbook savings, and certain types of money market
accounts) are, by definition, equal to the amount payable on demand at the
reporting date (i.e., their carrying amounts). Fair values of fixed-rate
certificates of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on
certificates to a schedule of aggregated expected monthly maturities on
time deposits.
Short-term borrowings: The carrying amounts of overnight Federal funds
purchased, borrowings under repurchase agreements, and other short-term
borrowings approximate their fair values.
Long-term debt: The fair values of the Company's long-term debt (other
than deposits) are estimated using discounted cash flow analyses, based on
the Company's current incremental borrowing rates for similar types of
borrowing arrangements.
1. BUSINESS COMBINATION -- PIONEER FEDERAL SAVINGS BANK
On August 6, 1993, the Company acquired for cash all of the outstanding stock
of Pioneer Fed BanCorp, Inc. ("Pioneer Holdings") at a purchase price of $87
million through the merger of Pioneer Holdings with and into the Company (the
"Merger"). As a result of the Merger, Pioneer Federal Savings Bank ("Pioneer"),
a savings bank with 19 branches statewide, became a wholly-owned subsidiary of
the Company. The acquisition was accounted for using the purchase method of
accounting and the results of operations of Pioneer are included in the
Consolidated Statements of Income from the date of acquisition. The excess of
cost over fair value of net assets acquired amounted to approximately $22
million.
The following unaudited pro forma information shows the consolidated
results of operations as though the above acquisition, including the related
purchase accounting adjustments, had been made at the beginning of the year:
- -------------------------------------------------------------------------------
(in thousands, except per share data) 1993 1992
- -------------------------------------------------------------------------------
Interest income $469,413 $533,427
Interest expense $183,860 $247,534
Other operating income $ 72,313 $ 65,446
Other operating expenses $227,473 $207,368
Net income $ 81,419 $ 88,550
Earnings per share $ 2.50 $ 2.75
===============================================================================
2. INVESTMENT SECURITIES
As of December 31, 1993, the Company adopted SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." The adoption of this
accounting policy had no material effect on the consolidated financial
statements of the Company.
41
31
NOTES TO FINANCIAL STATEMENTS (Continued) First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
HELD-TO-MATURITY
Comparative book and fair values of held-to-maturity investment securities at
December 31, 1994, 1993 and 1992 were as follows:
- ------------------------------------------------------------------------------
1994
-------------------------------------------
BOOK UNREALIZED UNREALIZED FAIR
(in thousands) VALUE GAINS LOSSES VALUE
- ------------------------------------------------------------------------------
U.S. TREASURY
AND OTHER U.S.
GOVERNMENT
AGENCIES AND
CORPORATIONS $568,894 $ -- $10,924 $557,970
COLLATERALIZED
MORTGAGE
OBLIGATIONS 200,420 -- 5,689 194,731
STATES AND POLITICAL
SUBDIVISIONS 154,493 3,600 1,087 157,006
OTHER 72,080 -- 136 71,944
- ------------------------------------------------------------------------------
TOTAL HELD-TO-MATURITY
INVESTMENT
SECURITIES $995,887 $3,600 $17,836 $981,651
==============================================================================
1993
-----------------------------------------------
Book Unrealized Unrealized Fair
(in thousands) Value Gains Losses Value
- ------------------------------------------------------------------------------
U.S. Treasury
and other U.S.
Government
agencies and
corporations $ 713,167 $ 1,490 $ 472 $ 714,185
Collateralized
mortgage
obligations 201,701 -- 849 200,852
States and political
subdivisions 177,876 12,530 413 189,993
Other 39,281 16 -- 39,297
- ------------------------------------------------------------------------------
Total held-to-maturity
investment
securities $1,132,025 $14,036 $1,734 $1,144,327
==============================================================================
1992
-------------------------------------------
Book Unrealized Unrealized Fair
(in thousands) Value Gains Losses Value
- ------------------------------------------------------------------------------
U.S. Treasury
and other U.S.
Government
agencies and
corporations $352,713 $ 3,506 $204 $356,015
Collateralized
mortgage
obligations 374,559 5,934 86 380,407
States and political
subdivisions 196,270 15,346 25 211,591
Other 27,647 2,498 336 29,809
- ------------------------------------------------------------------------------
Total held-to-maturity
investment
securities $951,189 $27,284 $651 $977,822
==============================================================================
The book and fair values of held-to-maturity investment securities at December
31, 1994, by contractual maturity, excluding securities which have no stated
maturity, were as follows:
- ------------------------------------------------------------------------------
BOOK FAIR
(in thousands) VALUE VALUE
- ------------------------------------------------------------------------------
DUE WITHIN ONE YEAR $497,145 $495,034
DUE AFTER ONE BUT WITHIN FIVE YEARS 255,249 250,961
DUE AFTER FIVE BUT WITHIN TEN YEARS 37,095 35,781
DUE AFTER TEN YEARS 153,492 146,969
- ------------------------------------------------------------------------------
TOTAL HELD-TO-MATURITY
INVESTMENT SECURITIES $942,981 $928,745
==============================================================================
AVAILABLE-FOR-SALE
Comparative amortized cost and fair values of available-for-sale investment
securities at December 31, 1994 were as follows:
1994
---------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
(in thousands) COST GAINS LOSSES VALUE
- ------------------------------------------------------------------------------
U.S. TREASURY
AND OTHER U.S.
GOVERNMENT
AGENCIES AND
CORPORATIONS $ 50,047 $ -- $ 922 $ 49,125
COLLATERALIZED
MORTGAGE
OBLIGATIONS 25,961 -- 371 25,590
STATES AND POLITICAL
SUBDIVISIONS 11,700 -- 423 11,277
OTHER 66,000 -- -- 66,000
- ------------------------------------------------------------------------------
TOTAL AVAILABLE-
FOR-SALE
INVESTMENT
SECURITIES $153,708 $ -- $1,716 $151,992
==============================================================================
The amortized cost and fair values of available-for-sale investment securities
at December 31, 1994, by contractual maturity, were as follows:
- ------------------------------------------------------------------------------
AMORTIZED FAIR
(in thousands) COST VALUE
- ------------------------------------------------------------------------------
DUE WITHIN ONE YEAR $ -- $ --
DUE AFTER ONE BUT WITHIN FIVE YEARS 65,047 64,126
DUE AFTER FIVE BUT WITHIN TEN YEARS 145 144
DUE AFTER TEN YEARS 88,516 87,722
- ------------------------------------------------------------------------------
TOTAL AVAILABLE-FOR-SALE
INVESTMENT SECURITIES $153,708 $151,992
==============================================================================
At December 31, 1993, the unamortized cost of available-for-sale investment
securities, which approximated fair value, was $98,453,000.
The Company sold certain investment securities and recognized a gain of
$1,873,000 in the second quarter of 1993. The Company held no trading
securities as of December 31, 1994 and 1993.
42
32
NOTES TO FINANCIAL STATEMENTS (Continued) First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
As of December 31, 1994, the Company had entered into interest rate swaps
of $138,247,000 notional amount designed to modify the repricing
characteristics of a portion of its municipal holdings. The fair value of the
interest rate swaps was an unrealized loss of $3,130,000. However, it is
management's intent to keep the interest rate swaps in place until their
respective termination dates which approximate the maturities of the municipal
holdings, at which time the unrealized losses would be eliminated.
The Company also had other interest rate swaps of $896,866,000 notional
amount hedging other parts of the balance sheet. The fair value of these other
interest rate swaps was an unrealized loss of $18,024,000. Additional
information on the Company's interest rate swaps is provided in Note 16 to the
Financial Statements.
Investment securities with an aggregate book value of $926,750,000 at
December 31, 1994 were pledged to secure public deposits and repurchase
agreements as required by law.
The Company did not hold investment securities of any single issuer (other
than the U.S. Government and its agencies) which were in excess of 10% of
stockholders' equity at December 31, 1994.
Gross gains of $180,000, $2,038,000 and $283,000 and gross losses of
$2,000, $83,000 and $122,000 were realized on sales of investment securities
during 1994, 1993 and 1992, respectively.
At December 31, 1994, collateralized mortgage obligations were comprised of
$200,420,000 planned amortization class bonds (held-to-maturity) with an
estimated average life of .8 years and $25,590,000 (available-for-sale)
floating rate bonds with an estimated average life of 3.8 years and an average
floating rate of 9.0%.
3. LOANS AND LEASES
At December 31, 1994 and 1993, loans and leases were comprised of the
following:
1994 1993
------------------------- -------------------------
(in thousands) BOOK VALUE FAIR VALUE Book Value Fair Value
- --------------------------------------------------------------------------
Commercial,
financial and
agricultural $1,307,145 $1,258,988 $1,208,912 $1,219,156
Real estate:
Construction 320,783 319,575 317,036 317,017
Commercial 964,758 1,073,744 882,628 949,425
Residential 2,006,501 1,955,358 1,785,961 1,734,467
Consumer 467,827 467,792 459,910 456,226
Lease financing 230,587 230,598 201,449 201,512
Foreign 235,964 230,455 210,913 210,755
- --------------------------------------------------------------------------
TOTAL LOANS
AND LEASES $5,533,565 $5,536,510 $5,066,809 $5,088,558
==========================================================================
At December 31, 1994, loans totalling $40,848,000 were pledged to secure
public deposits as required by law.
At December 31, 1994 and 1993, loans and leases aggregating $55,824,000
and $60,312,000, respectively, were on a nonaccrual basis.
In the normal course of business, the Company makes loans to its executive
officers and directors, and to companies and individuals affiliated with
executive officers and directors of the Company. Changes in the loans to such
parties were as follows:
- --------------------------------------------------------------------------
(in thousands) 1994 1993
- --------------------------------------------------------------------------
Balance at beginning of year $411,279 $370,169
New loans made 53,734 244,171
Repayments (168,765) (203,061)
- --------------------------------------------------------------------------
BALANCE AT END OF YEAR $296,248 $411,279
==========================================================================
At December 31, 1994 and 1993, loans to such parties by the Parent were
$17,005,000 and $15,759,000, respectively, and the income related to these
loans was $1,089,000, $920,000 and $1,134,000 for 1994, 1993 and 1992,
respectively.
4. ALLOWANCE FOR LOAN AND LEASE LOSSES
Changes in the allowance for loan and lease losses were as follows for the
years indicated:
- --------------------------------------------------------------------------
(in thousands) 1994 1993 1992
- --------------------------------------------------------------------------
Balance at beginning of year $62,253 $56,385 $55,134
Provision charged to expense 22,922 13,262 12,812
Net charge-offs:
Loans and leases charged off (27,115) (15,063) (13,410)
Recoveries on loans and
leases charged off 3,190 2,444 1,849
- --------------------------------------------------------------------------
Net charge-offs (23,925) (12,619) (11,561)
- --------------------------------------------------------------------------
Allowance applicable to loans
of purchased company -- 5,225 --
- --------------------------------------------------------------------------
BALANCE AT END OF YEAR $61,250 $62,253 $56,385
==========================================================================
In May, 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan," which requires that impaired loans be measured based on
the present value of expected future cash flows discounted at the loan's
effective interest rate or the market price or fair value of the collateral if
the loan is collateral dependent. SFAS No. 114 is effective for fiscal years
beginning after December 15, 1994. The adoption of SFAS No. 114 will not have a
material effect on the Company's financial position or results of operations.
43
33
NOTES TO FINANCIAL STATEMENTS (Continued) First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
5. PREMISES AND EQUIPMENT
At December 31, 1994 and 1993, premises and equipment were comprised of the
following:
- --------------------------------------------------------------------------------
(in thousands) 1994 1993
- --------------------------------------------------------------------------------
Premises $220,295 $198,234
Equipment 126,207 128,302
- --------------------------------------------------------------------------------
346,502 326,536
Less accumulated depreciation
and amortization 108,146 93,049
- --------------------------------------------------------------------------------
NET BOOK VALUE $238,356 $233,487
================================================================================
Occupancy and equipment expenses include depreciation and amortization expenses
of $17,572,000, $15,133,000 and $14,383,000 for 1994, 1993 and 1992,
respectively.
6. DEPOSITS
For 1994, 1993 and 1992, interest expense related to deposits was as follows:
- --------------------------------------------------------------------------------
(in thousands) 1994 1993 1992
- --------------------------------------------------------------------------------
Interest-bearing demand $ 24,282 $ 26,036 $ 34,858
Savings 25,545 28,528 54,578
Time--Under $100 38,087 34,928 43,285
Time--$100 and over 24,588 23,581 36,281
Foreign 7,787 3,814 6,813
- --------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE
ON DEPOSITS $120,289 $116,887 $175,815
================================================================================
Time deposits in denominations of $100,000 or more at December 31, 1994 and
1993 were as follows:
- --------------------------------------------------------------------------------
(in thousands) 1994 1993
- --------------------------------------------------------------------------------
Domestic $611,757 $522,892
Foreign $270,234 $130,108
================================================================================
7. SHORT-TERM BORROWINGS
At December 31, 1994 and 1993, short-term borrowings were comprised of the
following:
- --------------------------------------------------------------------------------
(in thousands) 1994 1993
- --------------------------------------------------------------------------------
First Hawaiian Bank:
Federal funds purchased $ 195,859 $ 122,975
Securities sold under agreements
to repurchase 823,248 825,837
Advances from Federal Home
Loan Bank of Seattle 50,000 --
First Hawaiian, Inc. (Parent)--
Commercial paper 46,723 9,605
Nonbank subsidiaries--
Advances from Federal Home
Loan Bank of Seattle 213,986 111,265
- --------------------------------------------------------------------------------
TOTAL SHORT-TERM BORROWINGS $1,329,816 $1,069,682
================================================================================
Average rates and average and maximum balances for these short-term borrowings
were as follows for the years indicated:
- --------------------------------------------------------------------------------
(dollars in thousands) 1994 1993 1992
- --------------------------------------------------------------------------------
Federal funds purchased:
Average interest rate at
December 31 5.8% 2.7% 2.8%
Highest month-end balance $217,535 $172,215 $340,375
Average daily outstanding
balance $155,852 $ 98,042 $180,991
Average daily interest rate paid 4.4% 2.8% 3.6%
Securities sold under
agreements to repurchase:
Average interest rate at
December 31 5.4% 3.2% 3.5%
Highest month-end balance $883,036 $871,891 $806,793
Average daily outstanding
balance $792,790 $660,474 $499,084
Average daily interest rate paid 4.0% 3.2% 3.6%
Commercial paper:
Average interest rate at
December 31 6.2% 4.0% 3.4%
Highest month-end balance $ 46,723 $ 11,271 $ 25,549
Average daily outstanding
balance $ 14,092 $ 8,430 $ 13,617
Average daily interest
rate paid 4.7% 3.1% 4.1%
Advances from Federal Home
Loan Bank of Seattle:
Average interest rate at
December 31 6.0% 4.3% 3.4%
Highest month-end balance $279,437 $111,265 $ 37,500
Average daily outstanding
balance $153,008 $ 43,499 $ 29,891
- --------------------------------------------------------------------------------
Average daily interest rate paid 5.5% 4.6% 4.6%
================================================================================
Securities sold under agreements to repurchase were treated as financings and
the obligations to repurchase the identical securities sold were reflected as
liabilities with the dollar amount of securities underlying the agreements
remaining in the asset accounts. At December 31, 1994, the weighted average
maturity of these agreements was 86 days and represents investments by public
(governmental) entities. A schedule of maturities of these agreements is as
follows:
- --------------------------------------------------------------------------------
(in thousands)
- --------------------------------------------------------------------------------
OVERNIGHT $ --
LESS THAN 30 DAYS 214,503
30 to 90 DAYS 335,882
OVER 90 DAYS 272,863
- --------------------------------------------------------------------------------
TOTAL $823,248
================================================================================
44
34
NOTES TO FINANCIAL STATEMENTS (Continued) First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Commercial paper represents obligations of the Parent with maturities up to 180
days. The Parent had $70,000,000 in unused lines of credit with unaffiliated
banks to support its commercial paper borrowings as of December 31, 1994.
8. LONG-TERM DEBT
At December 31, 1994 and 1993, long-term debt was comprised of the following:
- ----------------------------------------------------------------------------
1994 1993
---------------------- ----------------------
BOOK FAIR Book Fair
(dollars in thousands) VALUE VALUE Value Value
- ----------------------------------------------------------------------------
First Hawaiian, Inc.
(Parent):
Note due 1997 $ 50,000 $ 49,988 $ 50,000 $ 50,006
6.25% subordinated
notes due 2000 100,000 97,555 100,000 97,345
First Hawaiian Bank--
7%-11% capital
lease obligations
due through 2041 778 778 826 1,804
Nonbank subsidiaries--
4.24%-6.55% notes
due through 2000 68,553 68,181 70,941 70,991
- ----------------------------------------------------------------------------
TOTAL LONG-TERM DEBT $219,331 $216,502 $221,767 $220,146
============================================================================
FIRST HAWAIIAN, INC. (PARENT)
The note due in 1997 represents two separate drawings of $24,000,000 and
$26,000,000 on a $50,000,000 unsecured commitment with interest payable at
preselected intervals of one, two or three months at London Interbank Offered
Rate ("LIBOR") plus .225% ($24,000,000 at 6.7875% and $26,000,000 at 6.60% at
December 31, 1994).
The 6.25% subordinated notes due in 2000 are unsecured obligations with
interest payable semiannually.
NONBANK SUBSIDIARIES
The 4.24%-6.55% notes due through 2000 represent advances from the Federal Home
Loan Bank of Seattle to the Company's nonbank subsidiaries (Creditcorp and
Pioneer) with interest payable monthly.
As of December 31, 1994, the principal payments due in the next five years
and thereafter on these borrowed funds were as follows:
- ----------------------------------------------------------------------------
First First
Hawaiian, Inc. Hawaiian Nonbank
(in thousands) (Parent) Bank Subsidiaries Total
- ----------------------------------------------------------------------------
1995 $ -- $ 33 $ -- $ 33
1996 -- 27 42,542 42,569
1997 50,000 29 20,012 70,041
1998 -- 33 3,999 4,032
1999 -- 36 1,000 1,036
2000 and
thereafter 100,000 620 1,000 101,620
- ----------------------------------------------------------------------------
TOTAL $150,000 $ 778 $68,553 $219,331
============================================================================
9. COMMON STOCK
On December 1, 1993, the Bank purchased certain assets and assumed certain
liabilities of GKN, Inc., which did business as Phoenix Financial Services, for
$1,000,000 in the form of an exchange for 41,186 newly-issued shares of the
Company's common stock.
On August 27, 1992, the Company entered into a merger agreement with
Finance Investment Company, Limited whereby the Company acquired FH Center,
Inc. and its parcel of land in exchange for 423,077 newly-issued shares of
the Company's common stock.
10. LIMITATIONS ON PAYMENT OF DIVIDENDS
The primary source of funds for the dividends paid by the Company to its
stockholders is dividends received from its subsidiaries. The Bank, Pioneer and
Creditcorp are subject to regulatory limitations on the amount of dividends
they may declare or pay. At December 31, 1994, the aggregate amount available
for payment of dividends by such subsidiaries without prior regulatory approval
was $333,981,000.
11. EMPLOYEE BENEFIT PLANS
PENSION PLANS
The Company has a noncontributory pension plan, covering substantially all
employees (Pioneer employees began participating in the plans effective January
1, 1994), after satisfying age and length of service requirements. It also has
an unfunded supplemental employee retirement plan for key executives.
The net pension expense for 1994, 1993 and 1992 included the following
components:
- ----------------------------------------------------------------------------
(in thousands) 1994 1993 1992
- ----------------------------------------------------------------------------
Service cost--benefits earned
during the period $ 3,832 $ 3,955 $ 3,724
Interest cost on projected
benefit obligation 6,294 6,553 5,933
Actual loss (return) on
plan assets 3,593 (3,810) (3,619)
Net amortization and deferral (12,123) (3,577) (3,429)
- ----------------------------------------------------------------------------
NET PENSION EXPENSE $ 1,596 $ 3,121 $ 2,609
============================================================================
The Company generally makes contributions to the trust fund of the regular
employee retirement plan equal to the amounts accrued for pension expense to
the extent such contributions are currently deductible for tax purposes.
45
35
NOTES TO FINANCIAL STATEMENTS (Continued) First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
The following table sets forth the reconciliation of the funded status of
the plans at December 31, 1994 and 1993:
- -------------------------------------------------------------------------------
(in thousands) 1994 1993
- -------------------------------------------------------------------------------
Actuarial present value of benefit obligation:
Vested benefits $62,900 $61,300
Nonvested benefits 3,100 3,100
- -------------------------------------------------------------------------------
ACCUMULATED BENEFIT OBLIGATION $66,000 $64,400
===============================================================================
Plan assets at fair value (primarily listed
stocks and fixed income securities) $84,044 $88,873
Projected benefit obligation 91,944 90,087
- -------------------------------------------------------------------------------
Plan assets less than projected
benefit obligation (7,900) (1,214)
Unrecognized net gain (736) (6,719)
Unrecognized prior service cost 6,959 7,640
Unrecognized net asset being
recognized over 9 and 15 years (8,264) (9,328)
- -------------------------------------------------------------------------------
PENSION LIABILITY $(9,941) $(9,621)
===============================================================================
Plan assets included 587,856 shares of common stock of the Company with a fair
value of $13,962,000 at December 31, 1994. The plan received dividends
totalling $694,000 from the Company for the year ended December 31, 1994.
The weighted average discount rate was 7.5% as of December 31, 1994, and
7.0% as of December 31, 1993. For both years, the rate of increase in future
compensation used in determining the projected benefit obligation was 5.0% for
the qualified pension plan and 7.0% for the unfunded supplemental retirement
plan. The expected long-term rate of return on plan assets was 8.5% for both
years.
POSTRETIREMENT BENEFITS
Effective January 1, 1993, the Company adopted SFAS No. 106, "Employer's
Accounting for Postretirement Benefits Other than Pensions" which changed the
practice of accounting for postretirement benefits from a cash basis to an
accrual basis during the expected service life of an employee. The Company has
been accounting for postretirement medical benefits on an accrual basis. As a
result, the adoption of SFAS No. 106 did not have a material effect on the
consolidated financial statements of the Company.
The Company has unfunded postretirement medical and life insurance plans
which are available to retirees who have satisfied age and length of service
requirements. The following table sets forth the reconciliation of the funded
status of the plan at December 31, 1994 and 1993:
- -------------------------------------------------------------------------------
(in thousands) 1994 1993
- -------------------------------------------------------------------------------
Actuarial present value of benefit obligation:
Retirees $ 3,196 $ 3,218
Other fully eligible plan participants 1,248 1,353
Other active plan participants 1,775 1,665
- -------------------------------------------------------------------------------
TOTAL $ 6,219 $ 6,236
===============================================================================
Funded status $ 6,219 $ 6,236
Unrecognized transition obligation (2,572) (2,714)
Unrecognized prior service cost (77) --
Unrecognized net gain (214) (697)
- -------------------------------------------------------------------------------
ACCRUED POSTRETIREMENT BENEFIT COST $ 3,356 $ 2,825
===============================================================================
Service cost $ 187 $ 161
Interest cost 430 406
Amortization of:
Transition obligation 143 143
Unrecognized prior service cost 6 --
- -------------------------------------------------------------------------------
NET PERIODIC POSTRETIREMENT BENEFIT COST $ 766 $ 710
===============================================================================
The assumed health care cost trend is not applicable since the medical plan
provides a flat dollar commitment. Thus, there is no effect due to a
one-percentage-point increase in the trend rate.
The weighted average discount rate was 7.5% as of December 31, 1994, and
7.0% as of December 31, 1993. For both years, the rate of increase in future
compensation used in determining the accumulated postretirement benefit
obligation was 5.0%.
PROFIT SHARING AND CASH BONUS PLANS
The profit sharing and cash bonus plans cover substantially all employees,
after satisfying age and length of service requirements. Annual contributions
to the plans are based upon a formula and are limited to the total amount
deductible under the applicable provisions of the Internal Revenue Code. The
profit sharing and cash bonus formula provides that 50% of the Company's
contribution be paid directly to eligible members as a year-end cash bonus and
the other 50%, less forfeitures, be paid into the profit sharing trust fund.
The profit sharing contribution and cash bonus (reflected in salaries and
wages) for 1994, 1993 and 1992 totalled $5,127,000, $4,328,000 and $4,738,000,
respectively.
46
36
NOTES TO FINANCIAL STATEMENTS (Continued) First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
INCENTIVE PLAN FOR KEY EXECUTIVES
The Company has an Incentive Plan for Key Executives (the "IPKE"), under which
awards of cash or common stock of the Company, or both, are made to key
executives. The IPKE limits the aggregate and individual value of the awards
that could be issued in any one fiscal year. Shares awarded under the Plan are
held in escrow and key executives concerned may not, under any circumstances,
voluntarily dispose or transfer such shares prior to the earliest of attaining
60 years of age, completion of 20 full years of employment with the Company,
retirement, death or termination of employment prior to retirement with the
approval of the Company. Additionally, there is a five year restriction from
the date of all subsequent shares awarded to those key executives who had
previously met the minimum restrictions of completion of 20 full years of
employment or attaining 60 years of age.
At December 31, 1994, 578,020 shares, including 20,049 authorized, but
unissued shares, were available for future awards under the IPKE.
STOCK INCENTIVE PLAN
In 1992, the stockholders approved a Stock Incentive Plan (the "SIP"), which
authorized the granting of up to 1,000,000 shares of common stock to key
employees. The purpose of the SIP is to promote the success and enhance the
value of the Company by providing additional incentives to selected key
employees in a way that links their interests with those of stockholders and
provides those employees with an incentive for outstanding performances. The
SIP is administered by the Executive Compensation Committee of the Board of
Directors. The SIP provides for grants of restricted stock, incentive stock
options, non-qualified stock options and reload options. Options are granted at
exercise prices not less than the fair market value of the common stock on the
date of grant. Options vest 25% per year after the date of grant. Stock options
have exercise periods no longer than ten years from the date of grant and may
not be exercised for six months after the date of grant and/or vesting. Stock
options can be exercised, in whole or in part, by payment of the option price
in cash or, if allowed under the option agreement, shares of common stock
already owned by the optionee (reload options). Upon the occurrence of a change
in control of the Company, as defined in the SIP, all options granted and held
at least six months become immediately vested and exercisable.
The following table summarizes activity under the SIP for 1994 and 1993
and the status at December 31, 1994:
- ------------------------------------------------------------------------------
Options
-------------------------------------------------
Outstanding Exercisable
--------------------- --------------------
Average Average
Option Option
(dollars in thousands) Shares Price Shares Price
- ------------------------------------------------------------------------------
Options granted 113,690 $26.00 -- $ --
Less forfeitures (758) 26.00 -- --
- ------------------------------------------------------------------------------
Balance at
December 31, 1992 112,932 26.00 -- --
Options granted 106,060 30.25 -- --
Became exercisable -- -- 28,422 26.00
Less:
Exercised (60) 26.00 (60) 26.00
Forfeitures (433) 26.00 -- --
- ------------------------------------------------------------------------------
Balance at
December 31, 1993 218,499 28.06 28,362 26.00
Options granted 139,380 26.60 -- --
Became exercisable -- -- 54,938 28.05
Less:
Forfeitures (11,675) 27.53 -- --
- ------------------------------------------------------------------------------
BALANCE AT
DECEMBER 31, 1994 346,204 $27.49 83,300 $27.35
==============================================================================
At December 31, 1994, 653,796 stock options were available for future grants
under the SIP.
LONG-TERM INCENTIVE PLAN
The Company has a Long-Term Incentive Plan (the "LTIP") designed to reward key
executives for the Company's and individuals' performances measured over
three-year periods. The first period covered 1991-1993; the second period
1992-1994; and so on. The LTIP has no expiration date. The LTIP is administered
by the Executive Compensation Committee of the Board of Directors. The LTIP
provides for the grant of incentive cash awards to certain key employees of the
Company after each three-year performance cycle. For each of the current
performance cycles, the Company's average return on assets relative to a group
of peer financial institutions and the Company's growth in assets are used to
measure the Company's performance and to determine the payout factor, which
ranges from 0% to 140% of base salaries. A threshold minimum performance level
of 15% average return on stockholders' equity must be achieved for each of the
current three-year performance cycles. The first three-year performance cycle
(1991-1993) ended on December 31, 1993. The threshold level was achieved during
this cycle. In 1994, payouts totalling $1,195,000 were made to various key
executives for the 1991-1993 cycle. The threshold level was not achieved for
the 1992-1994 cycle. Therefore, no LTIP payouts will be made in 1995.
POSTEMPLOYMENT BENEFITS
Effective January 1, 1994, the Company adopted SFAS No. 112, "Employers'
Accounting for Postemployment Benefits," which requires that the estimated
cost of
47
37
NOTES TO FINANCIAL STATEMENTS (Continued) First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
benefits provided by an employer to former or inactive employees after
employment but before retirement be accounted for on an accrual basis. The
adoption of SFAS 112 did not have a material effect on the financial position
or results of operations of the Company.
12. OTHER EXPENSES
For the years ended December 31, 1994, 1993 and 1992, other expenses included
the following:
- -------------------------------------------------------------------------------
(in thousands) 1994 1993 1992
- -------------------------------------------------------------------------------
Deposit insurance $11,388 $11,122 $11,122
Stationery and supplies 9,055 8,430 8,922
Advertising and promotion 7,745 6,911 6,326
Write-off of building costs -- 5,444 --
Trust loss 5,000 -- --
Other 48,320 42,082 33,509
- -------------------------------------------------------------------------------
TOTAL OTHER EXPENSES $81,508 $73,989 $59,879
===============================================================================
13. INCOME TAXES
Effective January 1, 1993, the Company adopted SFAS No. 109, "Accounting for
Income Taxes," the cumulative effect of which was the recognition of an income
tax benefit of $3,650,000, or $.11 per share, in the first quarter of 1993.
Such amount has been reflected in the Consolidated Statements of Income as the
cumulative effect of a change in accounting principle. Under SFAS No. 109,
deferred tax assets and liabilities are measured using enacted tax rates
scheduled to be in effect at the time the related temporary differences between
financial reporting and tax reporting of income and expense are expected to
reverse. The effect of changes in tax rates is recognized in income in the
period that includes the enactment date. On August 10, 1993, the Omnibus Budget
Reconciliation Act of 1993 was signed into law, increasing the Federal
corporate tax rate from 34% to 35%, retroactive to January 1, 1993. As a
result, the Company recognized retroactive adjustments to its deferred tax
liability and current tax provision of $1,520,000 and $402,000, respectively,
in the third quarter of 1993.
For the years ended December 31, 1994, 1993 and 1992, the provision for
income taxes was comprised of the following:
- -------------------------------------------------------------------------------
(in thousands) 1994 1993 1992
- -------------------------------------------------------------------------------
Current:
Federal $24,822 $19,755 $21,135
Hawaii 4,989 4,776 5,923
- -------------------------------------------------------------------------------
Total current 29,811 24,531 27,058
- -------------------------------------------------------------------------------
Deferred:
Federal 6,175 12,116 11,243
Hawaii 3,004 4,251 2,679
- -------------------------------------------------------------------------------
Total deferred 9,179 16,367 13,922
- -------------------------------------------------------------------------------
TOTAL INCOME TAX PROVISION $38,990 $40,898 $40,980
===============================================================================
The provision for income taxes has been reduced by investment, excise tax and
low income housing credits of $1,769,000, $1,000,000 and $985,000 in 1994, 1993
and 1992, respectively. The Company also has foreign tax credit carryforwards
amounting to $4,258,000 at December 31, 1994 which may be used to offset future
Federal income tax expense. The foreign tax credit carryover of $1,040,000,
$1,526,000 and $1,592,000 will expire at the end of 1997, 1998 and 1999,
respectively.
The components of net deferred income tax liabilities at December 31, 1994
and 1993 and January 1, 1993 were as follows:
- -------------------------------------------------------------------------------
December 31,
---------------------- January 1,
(in thousands) 1994 1993 1993
- -------------------------------------------------------------------------------
ASSETS
Federal and State income
tax credit carryovers $ 3,180 $ 2,494 $ 2,071
Employee benefit deductions 10,340 10,443 6,689
Provision for loan and lease
losses 32,706 25,201 21,838
Loan fees and other income 8,853 5,324 6,646
Hawaii State franchise taxes 5,007 5,959 2,481
Other -- -- 3,754
- -------------------------------------------------------------------------------
Total deferred income tax assets 60,086 49,421 43,479
- -------------------------------------------------------------------------------
LIABILITIES
Lease expenses 120,933 103,046 79,243
Depreciation expense 19,975 17,930 18,775
Intangible assets-net premiums 3,429 3,801 --
Other 3,815 3,531 --
- -------------------------------------------------------------------------------
Total deferred income
tax liabilities 148,152 128,308 98,018
- -------------------------------------------------------------------------------
NET DEFERRED INCOME
TAX LIABILITIES $(88,066) $(78,887) $(54,539)
===============================================================================
Net deferred income tax liabilities are included in other liabilities in the
Consolidated Balance Sheets.
At December 31, 1993, net deferred income tax liabilities include
$8,578,000 of net deferred income tax liabilities acquired in connection with
the Pioneer acquisition.
At December 31, 1994 and 1993, Federal income taxes had not been provided
on $2,832,000 of bad debt deductions. If in the future, these amounts are used
for any purpose other than to absorb losses on bad debts, a tax liability will
be imposed on the Company for these amounts at the then current income tax
rates.
48
38
NOTES TO FINANCIAL STATEMENTS (Continued) First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
The following analysis reconciles the Federal statutory income tax rate to
the effective income tax rate for the years indicated:
- --------------------------------------------------------------------
1994 1993 1992
- --------------------------------------------------------------------
Federal statutory income tax rate 35.0% 35.0% 34.0%
Municipal and other tax-
exempt income (4.0) (4.4) (4.5)
Hawaii State income and franchise
taxes, net of Federal tax benefit 4.7 4.9 4.4
Other (0.7) (1.2) (1.9)
- --------------------------------------------------------------------
EFFECTIVE INCOME TAX RATE 35.0% 34.3% 32.0%
====================================================================
14. INTERNATIONAL OPERATIONS
The Company's international operations involve foreign banking and
international financing activities, including short-term investments, loans,
acceptances, letters of credit financing and international funds transfers.
International activities are identified on the basis of the domicile of
the Company's customer.
Total revenue, income before income taxes, net income and total assets for
foreign, domestic and consolidated operations at and for the years ended
December 31, 1994, 1993 and 1992 were as follows:
- --------------------------------------------------------------------
(in thousands) Foreign Domestic Consolidated
- --------------------------------------------------------------------
1994
TOTAL REVENUE $ 26,533 $ 535,899 $ 562,432
INCOME BEFORE
INCOME TAXES $ 1,496 $ 110,005 $ 111,501
NET INCOME $ 972 $ 71,539 $ 72,511
TOTAL ASSETS $251,697 $7,283,447 $7,535,144
====================================================================
1993
Total revenue $ 26,586 $ 481,932 $ 508,518
Income before
income taxes $ 2,726 $ 116,379 $ 119,105
Net income $ 1,772 $ 80,085 $ 81,857
Total assets $326,197 $6,942,934 $7,269,131
====================================================================
1992
Total revenue $ 32,443 $ 512,728 $ 545,171
Income before
income taxes $ 4,843 $ 123,037 $ 127,880
Net income $ 3,196 $ 83,704 $ 86,900
Total assets $356,414 $6,196,968 $6,553,382
====================================================================
Under current intercompany pricing procedures, transfers of funds are priced at
prevailing market rates. In general, the Company has allocated all direct
expenses and a proportionate share of general and administrative expenses to
the income derived from loans and transactions by the Company's international
operations.
The following presents the percentages of average total assets and total
liabilities attributable to foreign operations. For this purpose, assets
attributable to foreign operations are defined as assets in foreign offices and
loans and leases to and investments in customers domiciled outside the United
States. Deposits received and other liabilities are classified on the basis of
domicile of the creditor.
- --------------------------------------------------------------------
1994 1993 1992
- --------------------------------------------------------------------
Average foreign assets to
average total assets 3.80% 6.19% 6.51%
Average foreign liabilities to
average total liabilities 3.15% 2.07% 2.68%
====================================================================
The Company did not have any foreign outstandings to any individual country
which exceeded 1% of total assets at December 31, 1994, 1993 and 1992.
15. LEASE COMMITMENTS
Future minimum lease payments by year and in the aggregate under all
noncancelable operating and capital leases having initial or remaining terms in
excess of one year consisted of the following at December 31, 1994:
- --------------------------------------------------------------------
Less Net
Operating Sublease Operating Capital
(in thousands) Leases Income Leases Leases
- --------------------------------------------------------------------
1995 $ 10,185 $ 1,567 $ 8,618 $ 173
1996 9,907 2,166 7,741 173
1997 23,612 3,814 19,798 173
1998 24,299 3,536 20,763 173
1999 22,674 3,719 18,955 173
2000 and thereafter 131,465 17,167 114,298 2,666
- -------------------------------------------------------------------
TOTAL $222,142 $31,969 $190,173 3,531
=========================================================
Less amount representing imputed
interest 2,753
------
PRESENT VALUE OF MINIMUM
LEASE PAYMENTS $ 778
===================================================================
These premises and equipment leases extend for varying periods up to 47 years
and some of them may be renewed for periods ranging from 1 to 40 years. The
premises' leases also provide for payments of real property taxes, insurance
and maintenance.
In most cases, leases for the premises provide for periodic renegotiation
of the rents based upon a percentage of the appraised value of the leased
property. The renegotiated annual rent is usually not less than the annual
amount paid in the previous period. Where future commitments are subject to
appraisals, the minimum annual rental commitments are based on the latest
annual rents.
In December, 1993, the Company entered into a noncancelable agreement to
lease a certain office building to be constructed on land owned in fee simple
by the Company. Concurrently, the Company entered into a ground lease of the
land to the lessor of the building. Rent obligation for the building will
commence on December 1, 1996 and will expire on December 1, 2003 (the "Primary
Term"). The Company is obligated to pay all taxes, insurance, maintenance and
other operating costs associated with the building during the Primary Term and
to assume certain responsibilities during the construction period. The Company
plans to occupy approximately 40% of
49
39
NOTES TO FINANCIAL STATEMENTS (Continued) First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
the building and sublease the remaining 60% to third parties. As of December
31, 1994, the Company has executed certain noncancelable subleases with third
parties. These amounts are included in sublease income in the above table.
At the end of the Primary Term, the Company may, at its option: (1) extend
the lease term at rents based on the lessor's cost of funds at the time of
renewal; (2) purchase the building for an amount approximately equal to that
expended by the lessor to construct the building; or (3) arrange for the sale
of the building to a third party on behalf of the lessor and pay to lessor any
shortfall between the sales proceeds and a specified residual value, such
payment not to exceed $161,990,000. This lease is accounted for as an operating
lease.
For 1994, 1993 and 1992, rental expense was $13,699,000, $8,782,000 and
$6,207,000, respectively.
16. COMMITMENTS AND CONTINGENT LIABILITIES
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
In the normal course of business, the Company is a party to various financial
instruments to meet the financing needs of its customers and to reduce its own
exposure to fluctuations in interest rates. These financial instruments include
commitments to extend credit, standby and commercial letters of credit and
interest rate floors and swaps. These instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amounts recognized
in the Consolidated and Parent Company Balance Sheets. The contract or notional
amounts of those instruments reflect the extent of involvement the Company has
in particular classes of financial instruments.
The Company's exposure to credit losses in the event of nonperformance by
the other party to the financial instrument for commitments to extend credit
and standby and commercial letters of credit is represented by the contractual
notional amount of those instruments. Since these commitments may expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash flows. For interest rate floor and swap transactions, the
contract or notional amounts do not represent exposure to credit losses.
Off-balance sheet instruments must meet the same criteria of acceptable
risk established for the Company's lending and other financing activities. The
Company manages the credit risk of counterparty defaults in these transactions
by limiting the total amount of outstanding arrangements, both by the
individual counterparty and in the aggregate, by monitoring the size and
maturity structure of the off-balance sheet portfolio, and by applying the
uniform credit standards maintained for all of its credit activities.
Off-balance sheet commitments and contingent liabilities at December 31,
1994 and 1993 were as follows:
- -----------------------------------------------------------------------------
1994 1993
--------- --------
NOTIONAL/ Notional/
CONTRACT Contract
(In Thousands) AMOUNT Amount
- -----------------------------------------------------------------------------
Commitments to extend credit $2,801,502 $2,377,421
Standby letters of credit $ 154,221 $ 103,537
Commercial letters of credit $ 10,207 $ 18,628
Interest rate floors $ - $ 300,000
Interest rate swaps $1,035,113 $ 619,217
===========================================================================
The Company enters into interest rate swap and floor agreements as an end-user
only. These instruments are used as hedges against various balance sheet
accounts. Credit exposure is monitored under the same credit guidelines as are
followed for other extensions of credit. Interest rate and/or market risk is
monitored and managed in conjunction with the total interest rate risk position
of the Company as a whole. Off-balance sheet agreements are not effected if
they would increase the Company's interest rate risk above current guidelines.
Sensitivity testing to measure and monitor this risk is done quarterly using
computer simulations of net interest income.
Variable rates for interest rate swap and floor agreements are based
either on the LIBOR or commercial paper rates as published by the Federal
Reserve Board Statistical Release H.15.
The following is a summary of the interest rate swap and floor activity
for 1994:
ROLLFORWARD SCHEDULE:
- -------------------------------------------------------------------------------------------------
Caps,
Receive Pay Floors or Indexed Variable/ Forward
(In Millions) Fixed Fixed Collars Amortizing Variable Basis Starting Total
- -------------------------------------------------------------------------------------------------
Balance,
December 31, 1993 $361 $257 $300 $ -- $ -- $ -- $ -- $ 918
Additions 10 -- -- -- 700 -- -- 710
Maturities/
amortizations 284 -- 300 -- -- -- -- 584
Terminations -- 9 -- -- -- -- -- 9
Forward starting
becoming effective -- -- -- -- -- -- -- --
- -------------------------------------------------------------------------------------------------
BALANCE,
DECEMBER 31, 1994 $ 87 $248 $ -- $ -- $700 $ -- $ -- $1,035
=================================================================================================
The following is additional hedging information related to the Company's
interest rate swaps as of December 31, 1994:
HEDGING SUMMARY:
- -----------------------------------------------------------------------------------------------
Asset Yield/ Net
Notional Pay Receive Liability Yield/ Original Remaining
(Dollars In Millions) Amount Rate Rate Cost Cost Maturity Maturity
- -------------------------------------------------------------------------------------------------
ASSET HEDGES:
Fixed rate loans $ 65 6.0% 5.9% 8.5% 8.4% 9.1 yrs. 7.8 yrs.
Municipal securities 138 10.0 6.3 11.6 7.9 9.4 1.0
Construction fund
investments 108 6.1 4.2 5.9 4.1 3.0 1.9
- ------------------------------
Subtotal 311 7.8 5.5 9.0 6.7 7.1 2.7
- ------------------------------
LIABILITY HEDGES:
Term debt 24 8.7 5.9 6.7 9.5 7.0 2.9
Savings deposits 700 6.0 5.0 2.7 3.7 2.6 1.8
- ------------------------------
Subtotal 724 6.1 5.0 2.8 3.9 2.7 1.8
- ------------------------------
TOTAL $1,035 6.6% 5.2% N/A N/A 4.0 YRS. 2.1 YRS.
=================================================================================================
50
40
NOTES TO FINANCIAL STATEMENTS (Continued) First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
The following summarizes the impact of the Company's interest rate swap and
floor activities on its weighted average borrowing rate and on interest income
and expense for the years ended December 31, 1994, 1993 and 1992:
- --------------------------------------------------------------------------------
(dollars in thousands) 1994 1993 1992
- --------------------------------------------------------------------------------
Average borrowing rate:
Without interest rate swaps
and floors 3.26% 3.11% 4.26%
With interest rate swaps
and floors 3.23% 2.96% 4.13%
================================================================================
Decrease in interest income $10,352 $12,664 $10,698
Decrease in interest expense 1,351 7,436 6,599
- --------------------------------------------------------------------------------
Interest rate swap/floor
expense, net $ 9,001 $ 5,228 $ 4,099
================================================================================
LITIGATION
Various legal proceedings are pending against the Company. In the opinion of
management, based upon advice of counsel, the aggregate liability, if any,
resulting from these proceedings would not have a material effect on the
Company's consolidated financial position or results of operations.
TRUST CONTINGENCY
In November, 1994 the Bank determined that some of the trust and
custodial accounts that it manages for customers had experienced decreases in
value which may have resulted from investment of trust and custodial client
funds in certain securities outside of the clients' express investment
guidelines. The Bank announced that trust and custodial accounts would be
compensated for investment losses directly attributable to investments made
contrary to the accounts' express investment directions. The Bank estimated
that possible losses and expenses related to the situation may reach
approximately $5,000,000. Consequently, a charge of $5,000,000 was recorded in
the fourth quarter of 1994. The Bank believes that the losses and costs related
to resolving this situation are substantially covered by insurance.
17. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents a summary of the book and fair values of the
Company's financial instruments at December 31, 1994 and 1993:
- --------------------------------------------------------------------------------
1994
------------------------
(in thousands) BOOK VALUE FAIR VALUE
- --------------------------------------------------------------------------------
FINANCIAL ASSETS
Cash and due from banks $ 269,876 $ 269,876
Interest-bearing deposits in other banks 11,670 11,670
Federal funds sold and securities
purchased under agreements to resell 180,000 180,000
Investment securities:
Held-to-maturity (note 2) 995,887 981,651
Available-for-sale (note 2) 151,992 151,992
Loans and leases (note 3) 5,533,565 5,536,510
Customers' acceptance liability 732 732
- --------------------------------------------------------------------------------
FINANCIAL LIABILITIES
Total deposits $5,152,213 $5,158,495
Short-term borrowings (note 7) 1,329,816 1,329,816
Acceptances outstanding 732 732
Long-term debt (note 8) 219,331 216,502
- --------------------------------------------------------------------------------
OFF-BALANCE SHEET FINANCIAL
INSTRUMENTS (note 16)
Commitments to extend credit $2,801,502 $ 11,489
Letters of credit 164,428 1,523
Interest rate swaps 1,035,113 (21,154)
================================================================================
1993
------------------------
(in thousands) Book Value Fair Value
- --------------------------------------------------------------------------------
FINANCIAL ASSETS
Cash and due from banks $ 436,129 $ 436,129
Interest-bearing deposits in other banks 116,736 116,736
Federal funds sold and securities
purchased under agreements to resell 35,000 35,000
Investment securities:
Held-to-maturity (note 2) 1,132,025 1,144,327
Available-for-sale (note 2) 98,453 98,453
Loans and leases (note 3) 5,066,809 5,088,558
Customers' acceptance liability 854 854
- --------------------------------------------------------------------------------
FINANCIAL LIABILITIES
Total deposits $5,220,128 $5,230,355
Short-term borrowings (note 7) 1,069,682 1,069,682
Acceptances outstanding 854 854
Long-term debt (note 8) 221,767 220,146
- --------------------------------------------------------------------------------
OFF-BALANCE SHEET FINANCIAL
INSTRUMENTS (note 16)
Commitments to extend credit $2,377,421 $ 11,032
Letters of credit 122,165 1,531
Interest rate floors 300,000 --
Interest rate swaps 619,217 (19,813)
================================================================================
51
41
NOTES TO FINANCIAL STATEMENTS (Continued) First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
18. FIRST HAWAIIAN, INC. (PARENT COMPANY ONLY) FINANCIAL STATEMENTS
BALANCE SHEETS
- --------------------------------------------------------------------------------
(in thousands, except number of DECEMBER 31,
shares and per share data) -----------------------
1994 1993
- --------------------------------------------------------------------------------
ASSETS
Cash on deposit with First Hawaiian Bank $ 110 $ 250
Loans 17,005 15,759
Investment securities -- 5,000
Securities purchased from
First Hawaiian Bank 6,180 13,125
Investment in subsidiaries:
First Hawaiian Bank 597,252 571,551
Other subsidiaries 155,113 146,153
Due from:
First Hawaiian Bank 83,604 65,886
Other subsidiaries 61,825 23,053
Other assets 2,257 4,919
- --------------------------------------------------------------------------------
TOTAL ASSETS $923,346 $845,696
================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Commercial paper $ 46,723 $ 9,605
Current and deferred income taxes 95,795 74,919
Other liabilities 2,884 2,803
Long-term debt 150,000 150,000
- --------------------------------------------------------------------------------
TOTAL LIABILITIES 295,402 237,327
================================================================================
Commitments and contingent liabilities
Stockholders' equity:
Common stock $5 par value
Authorized--100,000,000 shares
Issued--32,542,797 shares
in 1994 and 1993 162,713 162,713
Surplus 133,820 133,820
Retained earnings 346,339 311,836
Unrealized valuation adjustment (1,033) --
Treasury stock, 516,623 shares
in 1994, at cost (13,895) --
- --------------------------------------------------------------------------------
Total stockholders' equity 627,944 608,369
- --------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $923,346 $845,696
================================================================================
STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------
(in thousands) 1994 1993 1992
- --------------------------------------------------------------------------------
INCOME
Dividends from:
First Hawaiian Bank $34,660 $33,551 $31,043
Other subsidiaries 7,560 4,590 3,225
Interest from First Hawaiian Bank 448 419 417
Interest and fees from other
subsidiaries 799 321 817
Other interest and dividends 1,149 1,148 1,177
- --------------------------------------------------------------------------------
Total income 44,616 40,029 36,679
- --------------------------------------------------------------------------------
EXPENSES
Interest expense:
Commercial paper 663 259 564
Long-term debt 9,711 5,514 3,250
Other 107 254 125
Professional services 289 493 219
Other 351 381 106
- --------------------------------------------------------------------------------
Total expenses 11,121 6,901 4,264
- --------------------------------------------------------------------------------
Income before income tax
benefit and equity in
undistributed income of
subsidiaries 33,495 33,128 32,415
Income tax benefit 3,344 1,763 582
- --------------------------------------------------------------------------------
Income before equity in undistributed
income of subsidiaries 36,839 34,891 32,997
Equity in undistributed income
of subsidiaries:
First Hawaiian Bank 26,713 38,620 47,145
Other subsidiaries 8,959 8,346 6,758
- --------------------------------------------------------------------------------
NET INCOME $72,511 $81,857 $86,900
================================================================================
52
42
NOTES TO FINANCIAL STATEMENTS (Continued) First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------
(in thousands) 1994 1993 1992
- --------------------------------------------------------------------------------
CASH AT BEGINNING OF YEAR $ 250 $ 985 $ 240
- --------------------------------------------------------------------------------
Cash flows from operating activities:
Net income 72,511 81,857 86,900
Excess of equity in earnings
of subsidiaries over
dividends received (35,672) (46,966) (53,903)
Other (630) (439) (145)
- --------------------------------------------------------------------------------
Net cash provided by operating
activities 36,209 34,452 32,852
- --------------------------------------------------------------------------------
Cash flows from investing activities:
Net change in:
Securities sold to (purchased
from) First Hawaiian Bank 6,945 (2,545) 1,605
Loans made to directors and
officers (1,246) (657) (942)
Advances from (to) subsidiaries (34,600) (100) 40,100
Sale (purchase) of
investment securities 5,000 (5,000) --
Purchase of Pioneer
Fed BanCorp, Inc. -- (87,107) --
Capital contributions to
subsidiaries -- -- (4,509)
Other -- (343) (425)
- --------------------------------------------------------------------------------
Net cash provided by (used in)
investing activities (23,901) (95,752) 35,829
- --------------------------------------------------------------------------------
Cash flows from financing activities:
Net change in commercial
paper balances 37,118 (632) (34,061)
Proceeds from long-term debt -- 100,000 --
Cash dividends paid (38,008) (36,821) (34,161)
Issuance of common stock
under IPKE -- 493 438
Purchase of common stock for
issuance under IPKE and SIP (11,558) (2,475) (152)
- --------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities (12,448) 60,565 (67,936)
- --------------------------------------------------------------------------------
CASH AT END OF YEAR $ 110 $ 250 $ 985
================================================================================
Supplemental disclosures:
Interest paid $ 10,338 $ 3,740 $ 4,186
Net income taxes refunded $ (2,502) $ (375) $ (338)
================================================================================
53
43
CORPORATE ADDRESSES First Hawaiian, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
FIRST HAWAIIAN, INC. FIRST HAWAIIAN BANK
1132 Bishop Street 1132 Bishop Street
Honolulu, Hawaii 96813 Honolulu, Hawaii 96813
or or
P.O. Box 3200 P.O. Box 3200
Honolulu, Hawaii 96847 Honolulu, Hawaii 96847
Telephone: (808) 525-7000
FIRST HAWAIIAN CREDITCORP, INC. Cable Address: FIRSTBANK
Interstate Building, Second Floor (Honolulu, Hawaii)
1314 South King Street S.W.I.F.T.: FHBKUS77
Honolulu, Hawaii 96814 FedWire: ABA 121301015 FST HAW HONO
Telephone: (808) 593-5500
Japan Respresentative Office, Room 237,
FIRST HAWAIIAN LEASING, INC. Ohtemachi Building 6-1,
Interstate Building, Second Floor Ohtemachi 1-Chome, Chiyoda-Ku,
1314 South King Street Tokyo 100, Japan
Honolulu, Hawaii 96814 Telephone: (03) 3201-6081
Telephone: (808) 593-5300
PIONEER FEDERAL SAVINGS BANK
900 Fort Street
Honolulu, Hawaii 96813
Telephone: (808) 522-6777
SUPPLEMENTAL INFORMATION
- --------------------------------------------------------------------------------
First Hawaiian, Inc.'s shares are traded on The Nasdaq Stock Market, and
quotations are furnished under the Nasdaq symbol: FHWN.
TRANSFER AGENT
American Stock Transfer & Trust Company
40 Wall Street, 46th Floor
New York, New York 10005
FORM 10-K AND OTHER FINANCIAL INFORMATION
The Company's 1994 Form 10-K annual report, which is to be filed with the
Securities and Exchange Commission by March 31, 1995, will be available to
stockholders after that date. Analysts, investors and others seeking a copy of
the Form 10-K or any other financial information should write to:
Howard H. Karr
Executive Vice President and Treasurer
First Hawaiian, Inc.
P.O. Box 3200
Honolulu, Hawaii 96847
ANNUAL MEETING
The annual meeting of stockholders of First Hawaiian, Inc. will be held on
Thursday, April 20, 1995 at 9:30 A.M. in the 20th floor Dining Room of The
Plaza Club, 900 Fort Street, Honolulu, Hawaii.
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
Honolulu, Hawaii
DIVIDEND REINVESTMENT PLAN
Stockholders may reinvest their dividends in additional shares of the First
Hawaiian, Inc. common stock through the Dividend Reinvestment Plan.
Stockholders wishing to participate in the Plan can receive a descriptive
brochure and authorization card by writing to:
American Stock Transfer & Trust Company
40 Wall Street, 46th Floor
New York, New York 10005
or calling toll free at 1-800-937-5449
54
1
EXHIBIT 21. SUBSIDIARIES OF THE REGISTRANT
The Corporation or one of its wholly-owned subsidiaries beneficially owns 100%
of the outstanding capital stock and voting securities of the following
corporations. The Corporation is indirectly the sole general partner of First
Hawaiian Center Limited Partnership.
STATE OR OTHER
JURISDICTION OF
NAME INCORPORATION
---- -------------
First Hawaiian Bank Hawaii
First Hawaiian Overseas Corporation Hawaii
FIH International, Inc. Hawaii
American Security Properties, Inc. Hawaii
Real Estate Delivery, Inc. Hawaii
FH Center, Inc. Hawaii
FHB Mortgage Company, Inc. Hawaii
dba Phoenix Financial Services
FHB Properties, Inc. Hawaii
First Hawaiian Center Limited Partnership Hawaii
First Hawaiian Dealer Center, Inc. Hawaii
First Hawaiian Creditcorp, Inc. Hawaii
First Hawaiian Leasing, Inc. Hawaii
FHL SPC One, Inc. Hawaii
FHI International, Inc. Hawaii
Pioneer Federal Savings Bank Federal
Pioneer Advertising Agency, Inc. Hawaii
All subsidiaries were included in the consolidated financial statements of the
Corporation.
9
1
YEAR
DEC-31-1994
JAN-01-1994
DEC-31-1994
269,876
11,670
180,000
0
151,992
995,887
981,651
5,533,565
61,250
7,535,144
5,152,213
1,329,816
205,108
219,331
0
0
162,713
465,231
7,535,144
418,375
49,580
7,805
475,760
120,289
179,688
296,072
22,922
178
248,321
111,501
72,511
0
0
72,511
2.25
2.25
7.37
55,824
33,367
3,128
0
62,253
27,115
3,190
61,250
46,470
1,085
13,695
